Loan loss provisions in large publicly quoted European banks and auditor independence

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Date
2019-07-18
Authors
Campa, Domenico
Donnelly, Ray
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John Wiley & Sons, Inc.
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Abstract
The European Commission, citing deficiencies in the financial statements of banks during the financial crisis, has questioned the independence of the auditors of European banks at the onset of the crisis. We test for evidence of impaired auditor independence by examining if the economic bond between auditors and clients is associated with the audit quality of banks, controlling for the strength of banking regulation of the country in which a bank operates. We find no evidence of income‐increasing loan loss provisions being positively associated with the auditor–client economic bond. There is no indication that auditor independence is impaired in EU banks. Stronger country regulation is associated with more conservative provisioning before and after the formation of the European Banking Authority. We also find that the strength of banking regulation mitigates any tendency of auditors' independence to be compromised by the auditor–client economic bond.
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Keywords
Auditor independence , Banking regulation , European banks , Loan loss provisions
Citation
Campa, D. and Donnelly, R. (2019) 'Loan loss provisions in large publicly quoted European banks and auditor independence', International Journal of Auditing, 23(2), pp. 245-262. doi: 10.1111/ijau.12158
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© 2019, John Wiley & Sons Ltd. This is the peer reviewed version of the following article: Campa, D. and Donnelly, R. (2019) 'Loan loss provisions in large publicly quoted European banks and auditor independence', International Journal of Auditing, 23(2), pp. 245-262. doi: 10.1111/ijau.12158, which has been published in final form at https://doi.org/10.1111/ijau.12158. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.