Auditor Choice and the Consistency of Bank Accounting: are Some Auditors Stricter than Others When Assessing the Value of a Bank’s Loan Portfolio?

Abstract

The financial crisis of 2008 presents a natural experiment in which to study the impact of auditor choice on the loan fair-value disclosures of bank holding companies (BHCs). Using a sample of the largest 100 U.S. BHCs from 2007-2010, we examine the differences between banks’ disclosed fair value and book value of loans as a function of auditor choice, while controlling for banks’ relative financial condition. We find that being audited by Deloitte results in a more negative and statistically significant difference in the fair-value gap of bank loans relative to being audited by a non-Big-4 auditor.