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We examine the relationship between equity incentives and earnings management in the banking industry. By focusing on this regulated industry and using industry-specific earnings management proxies, we provide evidence on the impact of regulation on earnings management arising from chief executive officers’ equity incentives. We find that bank managers with high equity incentives are more likely to manage earnings, but only when capital ratios are closer to the minimums required by regulators. This finding indicates that, in the banking industry, potential regulatory intervention induces, rather than mitigates, earnings management arising from equity incentives.

Conventional wisdom holds that joint audits would improve audit quality by enhancing audit evidence precision because “Two heads are better than one.” Our paper challenges this wisdom. We show that joint audits by one big firm and one small firm may impair audit quality, because, in that situation, joint audits induce a free‐riding problem between audit firms and reduce audit evidence precision. We further derive a set of empirically testable predictions comparing audit evidence precision and audit fees under joint and single audits. This paper, the first theoretical study of joint audits, contributes to a better understanding of the economic consequences of joint audits on audit quality.

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This paper derives the impacts of legal system characteristics and auditing standards on auditor behavior (audit quality), and analyzes the determination of optimal auditing standards under different legal regimes. Legal regimes are characterized by differences in the uncertainty concerning the outcome of legal proceedings (termed vagueness of legal systems) and differences in the average size of damage awards. Auditing standards as determined by standard setters can vary in both toughness and vagueness. Our analysis provides implications for the adoption of International Standards on Auditing (ISA). Countries, such as the United States, where auditor legal liability is significantly more onerous than the global norm are not likely to adopt ISA, since these standards may not induce auditors to provide the optimal level of audit quality. Conversely, the adoption of ISA by countries, such as China, where the legal system makes the recovery of damages from auditors quite difficult, is not by itself likely to result in a high level of audit quality. Furthermore, our model suggests that auditor rotation can help improve audit quality, but only in certain circumstances.Les r epercussions conjointes des caract eristiques des r egimes juridiques multiples sur les normes d'audit et le comportement des auditeurs r esultat des proc edures judiciaires (ce que les auteurs appellent l'impr ecision des r egimes juridiques) et a l'ampleur moyenne des dommages-int erêts accord es. Les normes d'audit etablies par les normalisateurs peuvent varier sur le plan de la rigueur et de l'impr ecision. L'analyse des auteurs nous renseigne sur les cons equences de l'adoption des Normes internationales d'audit. Les pays comme les Etats-Unis, o u la responsabilit e civile de l'auditeur est sensiblement plus lourde que dans la norme mondiale, ne sont pas susceptibles d'adopter les normes internationales d'audit, puisque ces normes risquent de ne pas inciter les auditeurs a offrir une qualit e optimale d'audit. Inversement, l'adoption des normes internationales d'audit par des pays comme la Chine, o u le syst eme juridique complique passablement le recouvrement de dommages-int erêts aupr es des auditeurs, n'est pas en soi susceptible d' elever la qualit e de l'audit. En outre, le mod ele que proposent les auteurs semble indiquer que la rotation des auditeurs peut contribuer a am eliorer la qualit e de l'audit, mais uniquement dans des circonstances donn ees.