Do banks audited by specialists engage in less real activities management? Evidence from repurchase agreements

Neil L Fargher, Wenxuan Hou, John Ziyang Zhang

Research output: Contribution to journalArticlepeer-review

Abstract

Prior research documents that non-financial firms resort to more real activities management when their ability to manage accruals is constrained by specialist auditors (e.g., Chi et al. 2011; Burnett et al. 2012). Within the context of banks’ real activities management through repurchase agreements (repos), we argue that repo management can increase litigation risk for auditors and, hence, specialist auditors will pay greater attention to repo management and will better constrain the extent of such real activities management than nonspecialists. We find that banks audited by specialists, including both Big 4 and non-Big 4 specialists, are associated with less downward repo deviation than banks audited by non-Big 4 nonspecialists. We also find that banks audited by the joint national and city-level specialists are associated with less downward repo deviation than banks audited by Big 4 nonspecialists.
Original languageEnglish
Pages (from-to)149-169
JournalAuditing: A Journal of Practice and Theory
Volume38
Issue number1
Early online date25 Jan 2018
DOIs
Publication statusPublished - 28 Feb 2019

Keywords

  • auditor
  • banks
  • real activities management
  • repo
  • repurchase agreements

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