Bank Regulation/Supervision and Bank Auditing

60 Pages Posted: 11 Jun 2020

See all articles by Al (Aloke) Ghosh

Al (Aloke) Ghosh

UNC Charlotte

Henry Jarva

Aalto University - School of Business

Stephen G. Ryan

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

Date Written: May 17, 2020

Abstract

We investigate how overlapping activities of bank regulators and supervisors and bank auditors influence banks’ internal control quality, auditor-client contracting (audit fees and audit effort), and financial statement reliability. Using material weaknesses in internal controls as a proxy for internal control quality, we find that banks exhibit fewer internal control problems than do nonbanks. Using audit fees, earnings announcement lags and audit report lags as alternative proxies for audit effort, we find that auditors expend less effort in audits of banks than in audits of nonbanks. Despite the lower audit effort, we find that banks report fewer and less severe restatements of prior period financial statements than do nonbanks, suggesting that the aggregate efforts of bank regulators/supervisors and bank auditors generate more reliable financial reporting by banks. A notable implication of our study is that bank regulation and supervision alter the auditor-client contracting equilibrium, with a notable benefit being an increase in banks’ financial reporting quality.

Keywords: Banks, auditing, audit effort, regulation, supervision, internal controls, material misstatements, accounting

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

Suggested Citation

Ghosh, Al (Aloke) and Jarva, Henry and Ryan, Stephen G., Bank Regulation/Supervision and Bank Auditing (May 17, 2020). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3603346 or http://dx.doi.org/10.2139/ssrn.3603346

Al (Aloke) Ghosh (Contact Author)

UNC Charlotte ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

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

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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