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Earnings management and auditor specialization in the post-sox era: An examination of the banking industry

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  • DeBoskey, David Gregory
  • Jiang, Wei

Abstract

This study examines the impact of auditor specialization on bank loan loss provisions for a large cross-section of US banks for the period 2002–2006. We find a positive relationship between earning (before provision) and loan loss provision, suggesting that bank managers use LLP to smooth earnings in the post-SOX period. However, this relationship is significantly moderated by audit industry expertise, providing strong evidence that industry specialization constrains income smoothing. In further analysis, we find some evidence that auditor specialization is more effective in reducing potentially incoming-increasing earnings management. Our results hold after controlling for self-selection bias and are robust to alternative measures of industry specialization. Overall, our findings support the conclusion that audit industry expertise plays an effective monitoring role in constraining management’s discretionary accounting choices.

Suggested Citation

  • DeBoskey, David Gregory & Jiang, Wei, 2012. "Earnings management and auditor specialization in the post-sox era: An examination of the banking industry," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 613-623.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:2:p:613-623
    DOI: 10.1016/j.jbankfin.2011.09.007
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    More about this item

    Keywords

    Auditor specialization; Auditor industry expertise; Loan loss provision; Banking industry; Income smoothing; Earnings management;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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