The use of loan loss provisions for capital management, earnings management and signalling by Australian banks

The objective of this study is to examine whether and to what extent Australian banks use loan loss provisions (LLPs) for capital management, earnings management and signalling. We examine if there were changes in the use of LLPs due to the implementation of banking regulations consistent with the Basel Accord of 1988 which made loan loss reserves no longer part of Tier I capital in the numerator of the capital adequacy ratio. We find some evidence to indicate that Australian banks use LLPs for capital management, but no evidence of a change in this behaviour after the implementation of the Basel Accord. Our results indicate that banks in Australia use LLPs to manage earnings. Further, listed commercial banks engage more aggressively in earnings management using LLPs than unlisted commercial banks. We also find that earnings management behaviour is more pronounced in the post-Basel period. Overall, we find a significant understating of LLPs in the post-Basel period relative to the pre-Basel period. This indicates that reported earnings may not reflect the true economic reality underlying those numbers. Finally, Australian banks do not appear to use LLPs for signalling future intentions of higher earnings to investors.capital management; earnings management; signalling; Australian banks

International Auditing Standards in the United States: Comparing and Understanding Standards for ISA and PCAOB (Financial Accounting and Auditing Collection)

International auditing of publicly owned corporations is governed largely by either U.S. Public Company Accounting Oversight Board (PCAOB) auditing standards or International Standards on Auditing (ISA) established by the International Federation of Accountants (IFAC). In some respects, the U.S. PCAOB and ISA are similar, but in other ways they are not. In International Auditing Standards in the United States, the authors describe key differences between PCAOB auditing standards and ISA. The goal in doing so is to provide students, managers, and researchers with a clear, concise guide to the major differences between PCAOB and ISA standards. Understanding these differences will provide the reader with a greater appreciation of the differences in the auditing process between nations, and a greater understanding of what the audit opinion means as issued in different parts of the world. Asokan Anandarajan, professor of accounting and accounting information systems at the School of Management, New Jersey Institute of Technology, Newark, NJ. He has an MBA and MPhil from Cranfield University, UK and a PhD in accounting from Drexel University, Philadelphia. His research interests relate to earnings management and expectation gap auditing standards. He has published in many peer reviewed research journals including: Accounting Horizons, Auditing: A Journal of Practice and Theory, Accounting and Finance, and Advances in Accounting

International Auditing Standards in the United States : Comparing and Understanding Standards for ISA and PCAOB

https://digitalcommons.montclair.edu/all_books/1202/thumbnail.jp

The Usefulness of Off-Balance Sheet Variables As Predictors of Auditors’ Going Concern Opinions: An Empirical Analysis

Accounting literature is replete with quantitative models that use financial ratios to identify the probability of a going concern qualification. These studies, however, ignore qualitative cues that auditors use to identify going concern problems and mitigating factors (sound financial plans etc.) that auditors take into account in their choice of report. Tests whether, in the presence of financial distress, non-financial cues play an important role in auditors’ choice. Results indicate that non-financial variables can be used to discriminate between the auditor\u27s decision to issue the going concern qualified versus the clean report. Helps company management understand how auditors evaluate their clients and the importance of the qualitative criteria used in their evaluation. Can be used to predict the most probable outcome prior to the external audit. Second, facilitates understanding of the non-financial red flags that could trigger the going concern report. Third, can be used to analyze potential acquisition targets, and, if the acquisition target is still otherwise desirable, be used in pricing negotiations. Fourth, can be applied to aspects of the firm\u27s own division\u27s operations in order to enable the internal audit department to better allocate its own investigational and problem-solving resources. Finally, the fact that qualitative factors have power in predicting the going concern modified report suggests that company decision makers can evaluate others even if the auditor for political or other reasons has chosen not to render a modified report

International Auditing Standards in the United States : Comparing and Understanding Standards for ISA and PCAOB

Second Editionhttps://digitalcommons.montclair.edu/all_books/1480/thumbnail.jp

Inattentional Blindness and Its Relevance to Teaching Forensic Accounting and Auditing

Inattentional blindness, also known as perceptual blindness, is the phenomenon of not being able to see things that are actually there. This concept is not covered in traditional accounting classes in general and forensic accounting and auditing in particular. We discuss why forensic accountants and auditors should be aware of inattentional blindness and we show how it may impact the behavior of the individuals investigating and being investigated. We use a video to illustrate how this concept could be meaningfully incorporated into a teaching curriculum with a focus on forensic accounting and auditing. In particular, we provide illustrations of how this video could be used in forensic accounting and auditing classes to heighten student awareness of how blind spots could adversely affect the investigation process. We conclude by using the Leeson/Barings scandal (involving the fraud that brought down Barings bank) to illustrate how inattentional blindness can occur in a real-life fraud situation. We also provide additional material showing the relevance of inattentional blindness to the Madoff Ponzi scandal

Decision-Making Differences Between Big Six and Non-Big Six Auditing Firms: The Implications for the Internal Audit Function

Internal auditors have a direct interest in understanding how external audit firms make decisions that may have important implications for their own firm. Explores whether differently sized audit firms apply professional standards in a similar manner. Such uniform application should be expected given that all auditors should be guided by professional standards in making the qualification decision. The micro-economic environments facing big six and non-big six firms differ. Investigates whether big six and non-big six firms use the same information in deciding whether to issue a going concern modification. This study found that differently sized auditing firms did not apply the standards in a similar manner and did not use information available similarly. Internal audit audiences should find this lack of uniform application of interest since the internal audit function may be called in to contribute information to the decision-making process involved in selecting a new auditing firm. Also, the internal audit function may be involved in selecting acquisition targets for the firm. Should there be a suspicion of going concern problems involving a potential acquisition, the information provided in this paper should be useful to the internal audit function in evaluating the presence or lack of a going concern modification with respect to the potential acquisition\u27s financial statements

The impact of cognitive biases on fraudulent behaviour: the Leeson case

The forensic accounting literature (e.g., Albrecht et al., 2010) places a great deal of importance on the so-called fraud triangle of motive-means-opportunity. Wolfe and Hermanson (2004) presents a cognitive analysis of factors that may impact the motivation element in the fraud triangle, arguing that situational and other factors may lead individuals to engage in illegal acts without conscious intent to violate the law. We argue that cognitive analyses are important also in understanding individual evaluations of the means and opportunities that confront them. We draw on relevant psychological literature to show how cognitive heuristics can be used to explain why certain managers, in the presence of incentives, rationalise and commit fraud in accounting. We use the 'fraud diamond' (Wolfe and Hermanson, 2004) as the basis of our theoretical development. We use the Leeson/Barings bank's case as an example to demonstrate the application of cognitive biases in the perpetration of fraud.fraud triangle; management fraud; cognitive heuristics; cognitive bias; fraudulent behaviour; Nick Leeson; forensic accounting; psychology; incentives; Barings Bank.