Do Former Auditors on the Audit Committee Constrain Earnings Management? Evidence from the Banking Industry

45 Pages Posted: 24 Mar 2016 Last revised: 5 Dec 2018

See all articles by Kim Ittonen

Kim Ittonen

Hanken School of Economics - Department of Accounting

Per Tronnes

University of New South Wales (UNSW)

Sami Vähämaa

University of Vaasa

Date Written: December 03, 2018

Abstract

This paper examines whether former auditors on the audit committee constrain earnings management in the banking industry. Given the complexity and the size of banking organizations, it can be argued that the audit committees of large banks should possess a higher level of financial expertise than stipulated by the regulatory requirements in order to successfully monitor the financial reporting process. Using data on large publicly traded U.S. banks, we document a negative association between earnings management and the presence of audit committee directors with professional auditing experience. Specifically, our empirical findings indicate that banks with former auditors on the audit committee have lower levels of income-increasing as well as absolute discretionary loan loss provisions. We further document that the constraining effect of former auditors on earnings management is strongest for banks in which the former auditors on the audit committee have not been affiliated with the bank’s current audit firm. Overall, our results suggest that audit committee directors with professional auditing experience may improve financial reporting quality in the financial industry.

Keywords: Audit committees, former auditors, ex-auditors, discretionary loan loss provisions, earnings management, banks

JEL Classification: G20, G21, M40, M41, M42

Suggested Citation

Ittonen, Kim and Tronnes, Per and Vähämaa, Sami, Do Former Auditors on the Audit Committee Constrain Earnings Management? Evidence from the Banking Industry (December 03, 2018). Available at SSRN: https://ssrn.com/abstract=2753710 or http://dx.doi.org/10.2139/ssrn.2753710

Kim Ittonen

Hanken School of Economics - Department of Accounting ( email )

FI-00101 Helsinki
Finland

Per Tronnes

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Sami Vähämaa (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Vaasa, FI-65101
Finland
+358 29 449 8455 (Phone)

HOME PAGE: http://www.uva.fi/~sami

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