Do Banks Audited by Specialists Engage in Less Real Activities Management? Evidence from Repurchase Agreements

Abstract

SUMMARY Prior research documents that nonfinancial firms resort to more real activities management when their ability to manage accruals is constrained by specialist auditors (e.g., Chi, Lisic, and Pevzner 2011; Burnett, Cripe, Martin, and McAllister 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 non-specialists. 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 non-specialists. 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 non-specialists.