Three Essays In Financial Accounting And Auditing PDF Download

This thesis focuses on financial reporting. The main objective of the first chapter is to understand the role of fair value accounting, taking into account the possibility for banks to use their private information (Level 3 reporting) to compute fair values. Namely, I analyze a model of prudential regulation to shed some light on banks' incentives to use Level 3 reporting. I bring in accounting measures as the primary inputs into capital requirements set by a regulator to efficiently allocate control rights within a bank and to provide managerial discipline. My analysis of the Level 3 reporting externalities highlights an interesting tradeoff between transparency and financial stability. On the one hand, Level 3 reporting reduces the ability for a bank's stakeholders to extract information from financial statements of similar banks. On the other hand, Level 3 reporting decreases systemic risk caused by mark-to-market accounting. Further, manipulation makes Level 3 reporting less desirable, which may in turn increase systemic risk. I believe that the framework of this chapter offers other opportunities to study the real-effects of fair value accounting that have not yet been explored. The second chapter of this thesis is co-authored with Jeremy Bertomeu of the University of California San Diego and Haresh Sapra of the University of Chicago. In this chapter, we tackle the question of the optimal loan loss provisioning system for banks. In particular, we develop first a framework to study how accounting measurement and prudential regulation interact to affect a bank's incentives to originate credit. Our main result is that the accounting measurement system and bank leverage are policy tools that should be used in tandem, generating more value than systems that rely either on accounting regulation or on prudential regulation. Then, we use our results to shed some light on the current debate on the appropriate loan loss provisioning model for banks. We show that while banks engage in excessive risk-taking under an incurred loss model, an expected loss model can lead to excessive liquidations. The third chapter of this thesis moves away from financial reporting for banks to focus on the analysis of auditors' incentives to deliver high audit quality. In particular, I try to understand the impact of the provision of non-audit services (NAS) on audit firms' incentives, in order to conclude on the best way to regulate this industry. I believe that a better understanding of auditors' incentives is necessary to design better regulations. To that end, I develop a framework that provides new insights into the incentive effects of NAS on auditors. I show that it can be optimal for the investors of a client firm to let the external auditor provide NAS because of an incentive externality. Indeed, the possibility of providing NAS contingent on detecting financial misstatements increases the auditor's incentives to exert audit effort. However, despite this positive externality, the provision of NAS may decrease perceived audit quality, which may in turn render the provision of NAS by auditors undesirable. Thus, my analysis uncovers an interesting tradeoff for regulators between the positive incentive effect and the decrease in audit quality. Removing the current restriction on contingent audit fees may offset this ex post decrease in audit quality while preserving the ex ante incentives.