Bank audit practices and loan loss provisioning

Abstract

I empirically examine the evolution of loan loss accounting across banks that differ categorically by external auditing practice. Using a partial adjustment model, and a sample of 75,505 observations on affiliated banks, 1995–2009, I find evidence of convergence across audit categories in target ratios of provisions for loan losses to nonaccrual loans. This is consistent with a standardized method of accounting for “impaired” loans. I observe less convergence, on the other hand, in target ratios of provisions for loan losses to loans, which appears to accommodate a role for managerial discretion.