تأثیر رگولاتورهای بانک و حسابرسان خارجی بر میزان ذخایر زیان وام The Effects of Bank Regulators and External Auditors on Loan Loss Provisions

1. Introduction This paper investigates how the objectives and incentives of bank regulators and external auditors affect loan loss provisions. Both groups examine financial reports during on-site safety and soundness examinations or financial statements audits and serve an important monitoring role given their access to internal bank information. In particular, regulators and auditors spend considerable time evaluating the loan loss provision, although this focus is driven by their different objectives (Balla, Rose and Romero, 2012). For regulators, the loan loss provision focus stems from safety and soundness concerns and the associated macroeconomic consequences, such as bank lending activity and systemic risk (Beatty and Liao, 2011; Bushman and Williams, 2015). The auditor focus is driven by the potential for misstatement given the high inherent risk associated with the loan loss provision estimate (AICPA, 2007). Anecdotal evidence suggests that these distinctions affect bank financial reporting and result in a potential conflict between the objectives of regulators and auditors (Black, 1990; Wall and Koch, 2000; Dugan, 2009), but this has been relatively unexplored by prior literature. This is an important omission given that regulators and auditors are influential in the financial reporting process and that loan loss accounting contributed to the severity of the most recent financial crisis (Barth and Landsman, 2010; Beatty and Liao, 2014; Armstrong, Guay, Mehran and Weber, 2016). To capture the influence of regulators and auditors on loan loss provisions, I examine differences in loan loss provision timeliness for a sample of commercial banks exhibiting variation in regulatory scrutiny and external audit status. Loan loss provisions are considered to be more timely if provisions are associated with current and future changes in non-performing loans (e.g., Nichols, Wahlen and Wieland, 2009).1 I focus on this aspect of the loan loss provision for three reasons. First, there is anecdotal evidence suggesting a conflict between regulators and auditors in their influence on the timing of loan loss recognition. Specifically, former Comptroller of the Currency John Dugan argues that auditors restrict the use of judgmental, forward-looking information due to earnings management concerns and a strict interpretation of loan loss accounting standards, which delays recognition until objective information is available (Dugan, 2009). Second, bank regulatory handbooks related to the loan loss provision specifically discuss an application of Generally Accepted Accounting Principles (GAAP) involving the comparison between the loan loss reserve and non-performing loans as well as a loss horizon of one year (OCC, 2012). Third, this is an important accounting choice for banks since delays in recognition are associated with significant economic consequences of particular interest to bank regulators, including more pro-cyclical lending, less discipline from outsiders over risk-taking, and greater contributions to systemic risk (Beatty and Liao, 2011; Bushman and Williams, 2012, 2015).