Do Bank Regulation and Supervision Substitute for Bank Auditing?

58 Pages Posted: 28 Sep 2017 Last revised: 5 May 2018

See all articles by Al (Aloke) Ghosh

Al (Aloke) Ghosh

City University of New York (CUNY) - Baruch College

Henry Jarva

Aalto University - School of Business

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Date Written: April 27, 2018

Abstract

We hypothesize that bank regulation and supervision reduce inherent and control risk in audits of banks, thereby enabling auditors to expend less effort on these audits than on audits of control firms that are economically similar but subject to less or no regulation and supervision. We show that banks exhibit fewer internal control and accounting problems, as indicated by material internal control weaknesses and financial statement restatements, than do control firms. We show that auditors expend less effort, as indicated by lower audit fees, in audits of banks than in audits of control firms, more so when bank regulation and supervision are more intense. Lastly, we show that banks are more likely than control firms to exhibit two types of earnings management that are of minor concern to bank regulators and supervisors but are known to have capital market consequences: more frequent small positive earnings changes and longer strings of earnings increases. These results suggest that reduced audit effort yields lower market discipline over banks.

Keywords: Banks, auditing, regulation, supervision, internal control, accounting

JEL Classification: G21, G23, G28, M41, M42

Suggested Citation

Ghosh, Al (Aloke) and Jarva, Henry and Ryan, Stephen G., Do Bank Regulation and Supervision Substitute for Bank Auditing? (April 27, 2018). Available at SSRN: https://ssrn.com/abstract=3043327 or http://dx.doi.org/10.2139/ssrn.3043327

Al (Aloke) Ghosh (Contact Author)

City University of New York (CUNY) - Baruch College ( email )

One Bernard Baruch Way
P.O. Box B12-225
New York, NY 10010
United States
646-312-3184 (Phone)
646-312-3161 (Fax)

Henry Jarva

Aalto University - School of Business ( email )

P.O. Box 21210
AALTO, FI-00076
Finland

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

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