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The relation between auditor reputation, earnings and capital management in the banking sector: An international investigation

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  • Magnis, Chris
  • Iatridis, George Emmanuel

Abstract

In this study we examine two types of manipulation: earnings and capital management (or capital adequacy management) in banks, using an international sample of banks from four countries (USA, UK, Germany and France), which in couples belong in common financial systems (two common – law countries and two code – law countries). In specific, we examine the implications of two aspects of auditor reputation, auditor type and auditor industry specialization, for earnings management via the manipulation of the earnings benchmark. We prove that different aspects of auditor reputation per financial system restrict the motivation of managers for earnings manipulation. Furthermore, we examine the levels of the earnings and capital management in banks by separating our research period in the pre – Basle II regime and the post – Basle II regime. We prove that in the post – Basle II period the banks per financial system limit earnings and capital adequacy management. Moreover, we examine the effects of auditor reputation both in earnings and capital management by using the same model taking into account the financial crisis of 2008 with the results of this (expanded) research to be highly interesting for each financial system.

Suggested Citation

  • Magnis, Chris & Iatridis, George Emmanuel, 2017. "The relation between auditor reputation, earnings and capital management in the banking sector: An international investigation," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 338-357.
    • Handle: RePEc:eee:riibaf:v:39:y:2017:i:pa:p:338-357
    DOI: 10.1016/j.ribaf.2016.09.006
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    5. Frederico A. Mourad & Rafael F. Schiozer & Toni R. E. dos Santos, 2020. "Bank Loan Forbearance: evidence from a million restructured loans," Working Papers Series 541, Central Bank of Brazil, Research Department.
    6. Salem, Rami & Usman, Muhammad & Ezeani, Ernest, 2021. "Loan loss provisions and audit quality: Evidence from MENA Islamic and conventional banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 345-359.
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    More about this item

    Keywords

    Earnings management; Capital adequacy management; Auditor’s reputation; Auditor’s expertise; Earnings benchmark; Loan loss provisions; Basle II; Financial crisis;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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