Fair Value Exposure, Auditor Specialization, and Banks’ Discretionary Use of the Loan Loss Provision

44 Pages Posted: 24 Sep 2012 Last revised: 10 Dec 2017

See all articles by Brian Bratten

Brian Bratten

University of Kentucky - Von Allmen School of Accountancy

Monika Causholli

University of Kentucky - Von Allmen School of Accountancy

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Date Written: August 2017

Abstract

In this study, we examine whether banks’ use of the loan loss provision (LLP) to manage earnings is associated with 1) the extent to which banks hold assets subject to fair value reporting and 2) the use of an industry specialist auditor. We find that banks with a greater proportion of assets subject to fair value reporting (i.e., higher fair value exposure) use less LLP-based earnings management but more transaction-based earnings management (i.e., earnings management achieved by timing the realization of gains/losses). We also find that banks engaging industry specialist auditors use less LLP-based earnings management. Our findings suggest that banks’ use of the LLP to manage earnings is more limited when they have access to alternative earnings management tools and when they engage an auditor with more industry knowledge. Our results should be informative to regulators, members of the banking industry, and academics interested in the earnings management behavior of banks.

Keywords: Fair Value Accounting, Auditor Specialization, Earnings Management, Loan Loss Provision

JEL Classification: M40, M41

Suggested Citation

Bratten, Brian and Causholli, Monika and Myers, Linda A., Fair Value Exposure, Auditor Specialization, and Banks’ Discretionary Use of the Loan Loss Provision (August 2017). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2151635 or http://dx.doi.org/10.2139/ssrn.2151635

Brian Bratten

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Monika Causholli

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,104
rank
18,284
Abstract Views
4,728
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information