Public Audit Oversight and the Originate-to-Distribute Model

62 Pages Posted: 2 Aug 2018 Last revised: 16 Jun 2021

See all articles by Daniel Aobdia

Daniel Aobdia

Pennsylvania State University - Smeal College of Business

Yiwei Dou

New York University (NYU) - Department of Accounting

Jungbae Kim

Singapore Management University - School of Accountancy

Date Written: May 5, 2021

Abstract

The originate-to-distribute (OTD) model, in which the originators of mortgages sell or securitize the mortgages to third parties, likely contributed to the 2008 financial crisis. Auditors were blamed for permitting clients to understate the risks of the model in their financial reports, fostering undisciplined lending. We investigate whether public audit oversight influences OTD lending by promoting more vigilant audits of the financial reports of originators. Using a difference-in-differences design prior to the financial crisis, we find reduced OTD lending by banks after the Public Company Accounting Oversight Board (PCAOB) criticizes their auditors’ audits of financial reports regarding OTD transactions. The reduction is greater for banks with poorer risk controls and stronger incentives to manage earnings. We also find a reduction in gains on loan sales and securitizations. The results suggest that PCAOB inspections can help discipline OTD lending, a real effect of public audit oversight in the United States.

Keywords: Regulation; PCAOB Inspections; Auditors; Originate-to-distribute model of lending; Securitization; Banks

JEL Classification: G21; G38; M41; M42

Suggested Citation

Aobdia, Daniel and Dou, Yiwei and Kim, Jungbae, Public Audit Oversight and the Originate-to-Distribute Model (May 5, 2021). Journal of Accounting and Economics, Forthcoming, Singapore Management University School of Accountancy Research Paper No. 2021-137, Available at SSRN: https://ssrn.com/abstract=3224921

Daniel Aobdia (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

Yiwei Dou

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States

Jungbae Kim

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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