The recent turmoil in global financial markets has accentuated the need to better understand the underlying bank risks and their determinants. A vast literature has emerged to analyse this issue in depth. Surprisingly, the role of auditing in monitoring and shaping bank risk has not hitherto been considered. This research fills this gap by examining the link between audit quality and the market’s assessment of bank risk in the G10 countries. We also analyse whether this relationship is affected by cross country regulatory differences and the IFRS introduction in 2005. We find that higher audit quality is associated with a lower level of bank risk taking. This link is stronger in countries with weaker regulations. Further, our findings suggest that the IFRS introduction was received favourably by the market with banks reporting under the IFRS having lower level of risk. This favourable market reaction is more pronounced for banks employing a Big audit firm. Overall, our empirical findings bear important strategic implications for bank regulators and supervisors with an interest in improving auditing standards and banking sector policies.
Audit quality, ifrs and perceived bank risks under heterogeneous regulations
PETTINICCHIO, ANGELA KATE;POZZA, LORENZO;PROVASOLI, ANGELO;
2013
Abstract
The recent turmoil in global financial markets has accentuated the need to better understand the underlying bank risks and their determinants. A vast literature has emerged to analyse this issue in depth. Surprisingly, the role of auditing in monitoring and shaping bank risk has not hitherto been considered. This research fills this gap by examining the link between audit quality and the market’s assessment of bank risk in the G10 countries. We also analyse whether this relationship is affected by cross country regulatory differences and the IFRS introduction in 2005. We find that higher audit quality is associated with a lower level of bank risk taking. This link is stronger in countries with weaker regulations. Further, our findings suggest that the IFRS introduction was received favourably by the market with banks reporting under the IFRS having lower level of risk. This favourable market reaction is more pronounced for banks employing a Big audit firm. Overall, our empirical findings bear important strategic implications for bank regulators and supervisors with an interest in improving auditing standards and banking sector policies.
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