00:00:01
we're here today with Wharton accounting
00:00:03
professor Allison Nicoletti to talk
00:00:04
about her latest research Allison thanks
00:00:06
for being here thanks for having me
00:00:08
so you're going to talk to us today a
00:00:09
little bit about your dissertation so
00:00:10
first of all could you give us kind of a
00:00:12
broad overview of what you looked at
00:00:14
sure so my dissertation examines how
00:00:16
external auditors and bank regulators
00:00:19
affect Lomas provision decisions
00:00:21
so the Lomas provision it's analogous to
00:00:23
bad debt expense for a non financial
00:00:25
firm and for banks it's one of the most
00:00:26
important accruals it makes up a large
00:00:29
part of their income statement and then
00:00:31
also it has implications because it's
00:00:33
tied to their loan quality so this is a
00:00:34
really important decision that banks
00:00:36
care about and also that the bank
00:00:37
regulators and external auditors are
00:00:39
concerned with and there's a lot of
00:00:41
discretion that goes into coming up with
00:00:43
the Lomas provision estimate so what's
00:00:45
interesting is that bank regulators are
00:00:47
involved in on-site safety and soundness
00:00:49
examinations and external auditors come
00:00:51
in and actually audit the financial
00:00:53
statements but these two groups have
00:00:54
very different objectives and incentives
00:00:56
where bank regulators are coming at it
00:00:58
more from the safety and soundness for
00:01:00
SEC perspective whereas auditors are
00:01:02
coming at it from a do the financial
00:01:05
statements comply with generally
00:01:06
accepted accounting principles so what I
00:01:08
find in my paper is that bank regulators
00:01:11
and auditors both seem to increase the
00:01:13
timing with which banks recognize loan
00:01:15
losses but at banks where there's both a
00:01:18
strict regulator and an external auditor
00:01:20
these banks are actually less timely
00:01:22
compared to banks that are unaudited but
00:01:25
have a strict regulator so what this
00:01:27
seems to suggest is that the auditor is
00:01:29
constraining timeliness relative to what
00:01:32
the bank regulator would prefer and this
00:01:34
is again probably tied to the objectives
00:01:36
and incentives that they have where
00:01:37
auditors are concerned about earnings
00:01:39
management and other discretionary
00:01:41
choices that banks might be making that
00:01:43
aren't necessarily tied to loan quality
00:01:45
whereas the regulator is less concerned
00:01:47
with that so what is the implications
00:01:50
there for first of all for a bank or for
00:01:53
even is there implications for like a
00:01:55
customer who's coming in to get a loan
00:01:57
well there's definitely implications for
00:01:59
the bank because the bank manager is
00:02:00
trying to balance these two potentially
00:02:02
opposing viewpoints so we have bank
00:02:04
regulators who are pushing more
00:02:06
timeliness versus the auditor who maybe
00:02:08
prefers less timeliness relative to the
00:02:10
regulator so that's one of the takeaways
00:02:12
is that bank managers do have to balance
00:02:13
that
00:02:14
but more importantly is that Lomas
00:02:16
Accounting Standards are actually
00:02:17
changing and this was the direct result
00:02:19
of the financial crisis so one of the
00:02:21
concerns with the current rules is that
00:02:23
auditors are concerned about the
00:02:25
discretion that banks have and that was
00:02:27
why they restricted is that they're
00:02:28
concerned that banks are managing
00:02:30
earnings or doing other opportunistic
00:02:32
things with the accounting this was all
00:02:34
this was a problem of in the financial
00:02:36
crisis because the threshold to
00:02:38
recognize the loss was very high so we
00:02:40
saw banks waiting quite a bit of time
00:02:42
before they recognized any losses so the
00:02:44
new accounting standards will be more of
00:02:46
an expected approach so banks will be
00:02:48
recognizing losses over the life of the
00:02:50
loan but there's going to be a lot more
00:02:53
discretion that goes into that so as far
00:02:55
as how this regulator auditor conflict
00:02:57
its resolved or actually gets worse
00:02:59
under the new accounting standards is an
00:03:01
open question now are there any
00:03:04
implications for just the average person
00:03:06
who's trying to get a loan or even a
00:03:08
business trying to get a loan or is this
00:03:10
more on the bank side well there could
00:03:13
be some implications as far as the new
00:03:14
accounting standards going into place so
00:03:16
to the extent that banks are going to
00:03:17
have to recognize greater loan losses
00:03:20
that has to hit somewhere on their
00:03:23
balance sheet so if it's coming out of
00:03:24
their capital and there's bank capital
00:03:26
requirements so that may actually result
00:03:28
in restricting lending purposes so it
00:03:30
could have an effect like that
00:03:31
my research probably can't speak to that
00:03:33
quite as much just because I'm looking
00:03:35
at a different accounting standard but
00:03:36
it does really just more speak to the
00:03:39
bank managers themselves and then
00:03:40
probably regulators auditors and groups
00:03:43
that are involved in overseeing the
00:03:45
audit profession now is there with bank
00:03:48
managers I mean has there been sort of
00:03:50
an historical in terms of like whether
00:03:52
they would serve trend towards what the
00:03:53
regulator's are looking for versus
00:03:54
auditors or vice versa and are there
00:03:57
ProGlide guess prevailing winds on as
00:04:00
far as that go there just does it depend
00:04:01
on the bank or so I think it probably
00:04:04
depends is the the short answer but
00:04:06
there's been a lot of conflict between
00:04:08
the regulator and auditor over the last
00:04:10
20 or 25 years so in the late 1990s
00:04:15
there was a conflict again between the
00:04:16
regulators and auditors where it seemed
00:04:18
that banks were trending more towards
00:04:19
the regulator view where they were
00:04:21
reserving to a great extent for loan
00:04:23
losses even perhaps more than the
00:04:25
economic
00:04:25
of their loan portfolio would imply so
00:04:28
the sec or so kind of a group that's
00:04:31
more aligned probably with the external
00:04:32
audit function was not happy about that
00:04:34
because it was basically shifting income
00:04:37
between reporting periods so there was a
00:04:39
struggle between the bank regulators and
00:04:41
the auditors or in the sec and what
00:04:43
ended up happening was is that the bank
00:04:45
regulators in the SEC issued new
00:04:46
guidance saying this is what you should
00:04:48
be doing for loan losses so actually the
00:04:51
SEC ended up winning that battle but now
00:04:53
following the crisis it seems that we're
00:04:55
actually shifting more back to a
00:04:57
standard that perhaps regulators would
00:04:59
prefer so I think that we'll probably
00:05:00
see Bank shifting more back to the
00:05:02
regulator view but they were more in the
00:05:05
audit SEC camp earlier in the decade and
00:05:09
so what's next for this research what
00:05:11
are you going to look at next so I have
00:05:13
a different project that I'm going to be
00:05:14
looking at that still related to bank
00:05:16
regulation but it's looking at the
00:05:17
dodd-frank act so what we're interested
00:05:19
in this paper is looking at specific
00:05:21
bright-line asset thresholds so many
00:05:23
Bank regulations and other regulations
00:05:26
in general but they have these
00:05:27
thresholds like ten billion in total
00:05:29
assets for instance we're above that
00:05:31
threshold banks are subject to
00:05:32
significant regulatory costs so what
00:05:35
we're looking at is whether those
00:05:37
bright-line thresholds seem to
00:05:38
incentivize merger activity and if they
00:05:41
do do these mergers and have different
00:05:43
outcomes relative to other mergers so
00:05:45
the preliminary findings of that would
00:05:47
suggest that these thresholds do spur
00:05:49
additional merger activity and at these
00:05:51
mergers that result from these
00:05:53
regulatory cost motivations do seem to
00:05:55
end up having poor outcomes relative to
00:05:58
other mergers great thank you so much
00:06:00
for talking with us thing
00:06:05
[Music]
00:06:13
you
00:06:20
[Music]
