The Effects of Bank Regulators and External Auditors on Loan Loss Provisions

Nicoletti, Allison

doi:10.2139/ssrn.3004690

Cited by 10 publications

(12 citation statements)

References 32 publications

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“…13]). Examining charge‐offs over the leading one‐year period is consistent with prior literature (e.g., Altamuro and Beatty [2010], Bushman and Williams [2012], Nicoletti [2018]). Based on the relationship between loan charge‐offs (CO) and the ALL, we use the ratio of charge‐offs in t +1 to ALL in t as our primary specification to evaluate the accuracy of the ALL estimate.…”

Section: Methodssupporting

confidence: 85%

“…In addition to our contribution to the PCAOB literature, our study also contributes to the literature on the influence of auditors and regulators on bank behavior (e.g., Nicoletti [2018]). Although bank regulators (e.g., Office of Comptroller of the Currency [OCC]) have voiced concerns that auditors are responsible for delayed loss recognition and potential underreserving for loan losses (Dugan [2009]), our results suggest that auditors may influence the estimates of public banks in a more conservative direction following PCAOB inspection findings.…”

Section: Introductionmentioning

confidence: 94%

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Do PCAOB Inspections Improve the Accuracy of Accounting Estimates?

Stuber¹,

Hogan

2020

J of Accounting Research

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Despite issuing extensive guidance related to the evaluation of accounting estimates, the PCAOB continues to identify deficiencies related to the audit of estimates through their inspections process. We examine whether PCAOB inspections lead to more accurate audited accounting estimates, defined as those that more closely match economic reality, by examining a significant estimate within the banking industry. We find that in contrast with the PCAOB's goal of more accurate and unbiased estimates, allowance for loan losses (ALL) estimates become less accurate and more conservative with higher levels of ALL‐related inspection findings for public company audits. We find no evidence of auditor response to PCAOB inspection findings for private‐company audits, which are not subject to PCAOB inspection. Overall, our findings cast doubt on the efficacy of PCAOB inspections in improving estimate accuracy and suggest that firms are managing inspection risk to the potential detriment of audit quality.

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Section: Methodssupporting

confidence: 85%

Section: Introductionmentioning

confidence: 94%

Do PCAOB Inspections Improve the Accuracy of Accounting Estimates?

Stuber¹,

Hogan

2020

J of Accounting Research

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“…First, we complement extant literature examining the effects of IFRS adoption on the comparability of financial statements (e.g., Barth et al 2012;Cascino and Gassen 2015) by providing evidence that comparability of banks' loan loss accounting has increased across EU countries. Second, we complement recent literature examining the impact of supervisory scrutiny on financial reporting outcomes in banks (Costello et al 2016;Bischof et al 2016;Nicoletti 2017). We show that local supervisory incentives and intervention can impede compliance with and consistent application of accounting standards (Ball 2006).…”

Section: Funnily Enough I Should Have Actually Been Taking Action Ovmentioning

confidence: 53%

Comparability and Predictive Ability of Loan Loss Allowances The Role of Accounting Regulation versus Bank Supervision

Gebhardt

Novotny-Farkas

2018

SSRN Journal

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We investigate whether and how the shift from discretionary forward-looking provisioning to the restrictive incurred loss approach under International Financial Reporting Standards (IFRS) in the European Union (EU) affects the crosscountry comparability and predictive ability of loan loss allowances. Given bank supervisors' keen interest in comparable and adequate loan loss allowances, we also examine the role of supervisors in determining financial statement effects around IFRS adoption. We find that the application of the incurred loss approach has led to more comparable loan loss allowances. However, some differences persist in countries where supervisors were reluctant to enforce the incurred loss approach. Our results also suggest that the predictive ability of loan loss allowances improved following IFRS adoption. Finally, in supplemental analyses we document that increased comparability of loan loss allowances is associated with the crosscountry convergence of the risk sensitivity of bank leverage indicating an improvement in the effectiveness of market discipline in the EU.

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“…In contrast to previous papers, these authors argue that, rather than by financial reporting incentives, discretion on LLP is driven by the need to meet regulatory capital requirements. 22 More recently, other authors have examined additional dimensions of LLP reporting, including tax incentives (Andries, Gallemore, and Jacob, 2017), sentiment in the estimation of LLP (Hribar et al, 2017), the interaction between external auditors and bank regulators (Nicoletti, 2018), and bank competition (Tommy, 2019).…”

Section: Literature On Loan Loss Provisionsmentioning

confidence: 99%

Forward Looking Loan Provisions: Credit Supply and Risk-Taking

et al. 2020

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We show corporate-level real, financial, and (bank) risk-taking effects associated with calculating loan provisions based on expected-rather than incurred-credit losses. For identification, we exploit unique features of a Colombian reform and supervisory, matched loan-level data. The regulatory change induces a dramatic increase in provisions. Banks tighten all new lending conditions, adversely affecting borrowing-firms, with stronger effects for risky-firms. Moreover, to minimize provisioning, more affected (less-capitalized) banks cut credit supply to risky-firms-SMEs with shorter credit history, less tangible assets or more defaulted loans-but engage in "search-for-yield" within regulatory constraints and increase portfolio concentration, thereby decreasing risk diversification.

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The Effects of Bank Regulators and External Auditors on Loan Loss Provisions

Cited by 10 publications

References 32 publications

Do PCAOB Inspections Improve the Accuracy of Accounting Estimates?

Do PCAOB Inspections Improve the Accuracy of Accounting Estimates?

Comparability and Predictive Ability of Loan Loss Allowances The Role of Accounting Regulation versus Bank Supervision

Forward Looking Loan Provisions: Credit Supply and Risk-Taking

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