Audit Partners and Loan Loss Provisioning: Evidence from U.S. Bank Holding Companies

Using confidential data on audit partner identities, this study explores the impact of individual audit partners on loan loss provisioning in U.S. bank holding companies (BHCs) from 2006 to 2019. The banking industry provides a unique setting where the objectives of auditors and regulators concerning provisioning often diverge. Regulators favor prudence and are concerned with underestimation. Auditors evaluate the adequacy of provision but tend to prioritize verifiability under GAAP. Thus, the banking industry provides a natural laboratory for studying auditor judgment and the impact of individual audit partners on loan loss provisioning. Unlike prior studies that document the impact of audit partner style on various client-firm outcomes, we find only modest evidence of audit partner heterogeneity on loan loss provisions for public BHCs and those audited by large firms, but not when we limit the sample period to the post-financial crisis years. These findings highlight a nuanced story: while audit partner heterogeneity can affect provisioning, especially during periods of economic uncertainty, the heterogeneity appears to be constrained in more stable periods. We also find that loan loss allowances increase over the duration of the partner tenure, especially in public and small BHCs. For small BHCs, this pattern persists even after the crisis, implying that longer auditor relationships may lead to more conservative provisioning, potentially due to developing client-specific knowledge.

Keywords: auditing, banking, audit partner names, PCAOB, audit partner tenure, auditor rotation

JEL Classification: G21, J01, J44, L84, M21, M42

Suggested Citation: Suggested Citation

Bhat, Gauri and Desai, Hemang and Koch, Christoffer and Mayer, Erik J. and Tzur-Ilan, Nitzan, Audit Partners and Loan Loss Provisioning: Evidence from U.S. Bank Holding Companies (January 19, 2023). SMU Cox School of Business Research Paper No. 24-13, Available at SSRN: https://ssrn.com/abstract=4973439 or http://dx.doi.org/10.2139/ssrn.4973439