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Loan Loss Provisions in Publicly Quoted European Banks and Auditor Independence

A lack of auditor independence has been blamed for some of the failings in the accounts of European banks during the recent financial crisis (European Commission, 2014).  As a consequence, on the 16th April 2014 new rules to improve statutory audits in the EU were adopted by the European Union (European Commission 2014).  This research will test if a lack auditor independence in European Banks is associated with lower audit quality.  We will use abnormal loan loss provisions (ALLPs) as indications of earnings management by banks and hence lower audit quality.   The economic bond between the auditor and its client banks will be measured by the level of abnormal fee income, especially fees from non-audit services, received from the client bank.   A positive association between lower quality of audit (income increasing earnings management) and abnormal fees will be taken to be indicative of a loss of auditor independence stemming from the economic bond between auditor and client.  We will test for the impact of regulation on auditor independence by exploiting the fact that banking regulation is not universally strong across Europe. We will also test if an alternative explanation for poor quality Financial Reports of some European banks exists.  Specifically, we test if a lack of timely provisioning due to the use of the incurred loss method of provisioning under IAS 39 is a better explanation for poor quality accounting in European banks.

Dr Ray Donnelly - UCC

The expected completion date for this research project is Spring 2017.

RESEARCHER PROFILES

Dr. Ray Donnelly

Having graduated with a BComm from UCC Dr. Ray Donnelly worked with the Industrial Credit Corporation.  He graduated with an MSc (Finance) from Lancaster University and subsequently studied for his Doctorate at the University of Manchester.  He is a Senior Lecturer in Accounting and Finance at UCC. His research interests include the relationship between security prices and accounting information.  He has also undertaken funded research and published in the areas of Auditing, Corporate Governance and Mergers & Acquisitions. He has published in both Irish and international journals including Accounting and Business Research, ABACUS, the Journal of Business Finance and Accounting, the Journal of International Business Studies, the European Management Journal, Corporate Governance an International Revie, the Accounting Finance and Governance Review and the British Accounting Review.

Dr. Domenico Campo

Domenico Campa is Professor of Accounting at the International University of Monaco (Principality of Monaco). He completed his PhD at University College of Cork in 2011 and worked as Assistant Professor at Trinity College Dublin. He also served the board of the European Accounting Association as national representative for Ireland from 2013 to 2016. His research interests mainly involve auditing, earnings quality, IFRS adoption, corporate governance. Having studied in both Italy and Anglo-Saxon contexts, his interests include the analysis of impacts of institutional setting on economic variables. His studies have been published in international refereed journals including Accounting and Business Research, Journal of Accounting, Auditing and Finance, Managerial Auditing Journal, International Review of Financial Analysis and International Review of Law and Economics.

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