Auditor Conservatism and Banks' Measurement Uncertainty During the Financial Crisis

14 Pages Posted: 11 Feb 2016

See all articles by Feng Chen

Feng Chen

University of Toronto - Rotman School of Management

Kevin C. K. Lam

Hang Seng Management College; The Chinese University of Hong Kong (CUHK) - School of Accountancy

Wally Smieliauskas

University of Toronto - Rotman School of Management

Minlei Ye

University of Toronto

Date Written: March 2016

Abstract

During the most recent financial crisis, the economic difficulties, along with potentially high uncertainties associated with fair value estimates, increased the audit risks for bank auditors. We analyze a sample of US public banks during the crisis (2008–09) and after the crisis (2010–11), and provide contrasting evidence concerning auditors' role in conservative financial reporting (proxied by higher discretionary loan loss provisions). Specifically, we document a significant positive association between discretionary loan loss provisions and the role of auditors (proxied by higher amounts of audit fees and abnormal audit fees) during the crisis. However, the positive association disappears following the financial crisis. Similarly, we document that during the crisis, auditors are less likely to issue unmodified audit opinions to banks that subsequently filed for bankruptcy. Thus, our evidence is consistent with elevated auditor conservatism for the sample banks during the financial crisis. Our evidence also suggests that bank auditors raise fees more to maintain accounting quality than to price protect from aggressive accounting choices.

Keywords: Auditor conservatism, discretionary loan loss provision, audit fees, asset measurement uncertainty

Suggested Citation

Chen, Feng and Lam, Kevin C. K. and Smieliauskas, Wally and Ye, Minlei, Auditor Conservatism and Banks' Measurement Uncertainty During the Financial Crisis (March 2016). International Journal of Auditing, Vol. 20, Issue 1, pp. 52-65, 2016, Available at SSRN: https://ssrn.com/abstract=2730948 or http://dx.doi.org/10.1111/ijau.12055

Feng Chen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Kevin C. K. Lam

Hang Seng Management College ( email )

Hang Shin Link
Siu Lek Yuen
Shatin, Hong Kong
China

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

Wally Smieliauskas

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Minlei Ye

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

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