Do Banks Audited by Specialists Engage in Less Real Activities Management? Evidence from Repurchase Agreements

46 Pages Posted: 19 Jan 2018

See all articles by Neil L. Fargher

Neil L. Fargher

Australian National University (ANU)

Wenxuan Hou

University of Edinburgh - Business School

John Ziyang Zhang

University of Edinburgh

Date Written: January 3, 2018

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 (e.g., Chi et al. 2011; Burnett et al. 2012). 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 nonspecialists. We find that banks audited by specialists, including both Big 4 and non-Big 4 specialists, are associated with less downward repo deviation than banks audited by non-Big 4 nonspecialists. We also find that banks audited by the joint national and city-level specialists are associated with less downward repo deviation than banks audited by Big 4 nonspecialists.

Keywords: Auditor; Banks; Real Activities Management; Repo; Repurchase Agreements

JEL Classification: G21; G30; M42

Suggested Citation

Fargher, Neil L. and Hou, Wenxuan and Zhang, John, Do Banks Audited by Specialists Engage in Less Real Activities Management? Evidence from Repurchase Agreements (January 3, 2018). Auditing: A Journal of Practice & Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3103954

Neil L. Fargher

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Wenxuan Hou

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

John Zhang (Contact Author)

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

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