Is Audit Quality Associated with Window Dressing of Short-Term Borrowings in the Banking Industry?

Abstract

We investigate the role of audit specialists in the banking industry. Different from prior research examining audit specialists in nonfinancial firms, we find that banks audited by specialists have lower levels of both accruals management (through abnormal loan loss provisions) and real activities management (through quarter-end repo transactions). We also find that this reduction of accruals and real activities management exists in banks audited by national as well as city level specialists.