Abstract
Since DeAngelo's study (1981) on audit quality, the latter has been a topic well discussed in the international accounting literature; however, there is little evidence about audit quality in the financial market. In Brazil, studies on audit quality began only in the 2000s, although without a specific focus on banks. The purpose of this study was to identify the quality determinants of audit work in Brazilian banking institutions. Using the practice of earnings management as a proxy for audit quality - more specifically, the discretionary accruals related to the process of the constitution of the Loan Loss Provision (LLP) - tests were performed based on the quarterly information of commercial and multipleservice banks and savings banks from 2001 to 2012. Empirical tests have shown that the quality of audit work has several types of relationships as follows: negative with the client importance level for the auditor; negative with the works after the sixth year of the contract; positive with the establishment of the Audit Committee by the banks; positive with the judgment of punitive administrative proceedings against independent auditors; and positive with the level of rigor of the regulatory environment. Of the tested hypotheses, three were not confirmed empirically. The first hypothesis predicted an association between audit quality and the auditor degree of specialization in the banking industry. The second hypothesis predicted that audit quality would be negatively correlated with the degree of concentration of audit activity within the National Financial System (Sistema Financeiro Nacional - SFN). The third hypothesis predicted that audit quality would be lower when the auditorclient relationship is of a short term. The results of the study contribute to the debate concerning the role of auditors in the transparency and solidity of the financial system, including their role as a complementary or auxiliary supervisor.
Highlights
The performance of independent auditors is deemed fundamental to the functioning of the financial and capital markets based on the assumption that, by issuing an opinion on the reliability of accounting information, it contributes to a business environment characterized by trust and credibility (Newman, Patterson & Smith, 2005; Ojo, 2008; Basel Committee on Banking Supervision [BCBS], 2008; Zagonov, 2011)
If the manager inflates the results to hide unfavorable information, and the auditor does not mitigate this manipulation, the financial reports do not provide warning of potential problems. Another aspect to be highlighted to demonstrate the relevance of quality measurements of financial information for estimating audit quality is that even studies using measures such as the size of the audit company or auditor specialization as proxies of quality adopt a standard procedure to test the relationship between these measures and the level of discretionary accruals when they need to confirm the validity of these metrics
The results found by Carcello and Nagy (2004) and Krishnan (2005) indicate that auditor specialization is an element that enhances the quality of financial disclosure and mitigates the probability of fraudulent statements
Summary
The performance of independent auditors is deemed fundamental to the functioning of the financial and capital markets based on the assumption that, by issuing an opinion on the reliability of accounting information, it contributes to a business environment characterized by trust and credibility (Newman, Patterson & Smith, 2005; Ojo, 2008; Basel Committee on Banking Supervision [BCBS], 2008; Zagonov, 2011). Concerns regarding the occurrence of audit failures in the banking system are discussed by the Basel Committee on Banking Supervision (BCBS, 2008), which highlighted the need for greater confidence by bank supervisors regarding the audited information and character of large audit companies, due to issues such as the increasing complexity of accounting norms and financial instruments, as well as changes associated with the estimation of the fair value This concern by bank supervisors is justified, because the performance of independent auditors has a direct relationship with the purpose of ensuring the credibility of the financial reporting process, and the reliability of financial reporting is an essential condition for the functioning of the banking system, as financial institutions are exposed to the risk of “bank run” in the case of suspicion by depositors. The present study uses data from the Quarterly Financial Information of commercial, multiple-service and savings banks, available on the website of the Central Bank of Brazil (Banco Central do Brasil BCB), considering the period 2001–2012
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