Do Banks Audited by Specialists Engage in Less Real Activities Management?

• In Event: Breakfast and Research & Education Table Forum
  In Roundtable Session: Table 1: Audit Industry Expertise

Abstract

Prior research documents that non-financial firms resort to more real activities management when their ability to manage accruals is constrained by specialist auditors. Within the context of banks’ real activities management through repurchase agreements (repos), we argue that repo management can increase litigation risk for auditors and, hence, specialist auditors will pay greater attention to repo management and will better constrain the extent of such real activities management than non-specialists. We find that banks audited by specialists have less downward repo deviation than banks audited by non-Big 4 non-specialists. We find that audits by both Big 4 and non-Big 4 specialists are associated with less downward repo deviation than banks audited by non-Big 4 non-specialists.

Authors

• Neil L Fargher, Australian National University

• Wenxuan Hou, University of Edinburgh

• John Ziyang Zhang, University of Liverpool