Subject The article addresses external audit of banks and the influence of bank audit on bank activities, analyzes factors impacting the bank profitability, and the degree of influence of audit firms on bank operations. Objectives The aim is to review various classifications of audit firms and their impact on profitability of bank assets. Methods I employ a regression analysis using linear models with fixed individual effects. The Mobile database that includes various financial and accounting indicators of Russian banks from 2005 to 2016 serves a major resource for the study. Results The fact that an audit firm belongs to the Big Four has a positive impact on the profitability of bank assets in the next period. The market share and specialization of the audit firm have no effect on this indicator. Conclusions Every year banks face the choice of an auditing company. The choice in favor of the Big Four is quite justified: large banks benefit from the reputation of the audit firm, which influences their profitability despite significant cost of audit services. Small banks should choose other than the Big Four audit firms to reduce the cost of audit.
Keywords: audit activity, bank profitability, audit firm reputation, financial statements quality, Big Four
References:
Sheshukova T.G., Beresneva A.V. [Issues of independence of the contemporary auditing practice: philosophical considerations]. Mezhdunarodnyi bukhgalterskii uchet = International Accounting, 2015, no. 19, pp. 38–45. URL: Link (In Russ.)
Nikiforov S.L. [Mandatory rotation of audit firms: pro and contra]. Den'gi i kredit = Money and Credit, 2017, no. 2, pp. 24–26. (In Russ.)
DeAngelo L.E. Auditor independence, ‘low balling’, and disclosure regulation. Journal of Accounting and Economics, 1981, vol. 3, iss. 2, pp. 113–127. URL: Link90009-4
DeAngelo L.E. Auditor size and audit quality. Journal of Accounting and Economics, 1981, vol. 3, iss. 3, pp. 183–199. URL: Link90002-1
Dye D.A. Auditing standards, legal liability and auditor wealth. Journal of Political Economy, 1993, vol. 101, iss. 5, pp. 887–914. URL: Link
Weber J., Willenborg M., Zhang J. Does Auditor Reputation Matter? The Case of KPMG Germany and ComROAD AG. Journal of Accounting Research, 2008, vol. 46, iss. 4, pp. 941–972. URL: Link
Boone J.P., Khurana I.K., Raman K.K. Do the Big 4 and the Second-tier firms provide audits of similar quality? Journal of Accounting and Public Policy, 2010, vol. 29, iss. 4, pp. 330–352. URL: Link
Chou J., Zaiats N., Zhang B. Does auditor choice matter to foreign investors? Evidence from foreign mutual funds worldwide. Journal of Banking & Finance, 2014, vol. 46, pp. 1–20. URL: Link
Pittman J.A., Fortin S. Auditor choice and the cost of debt capital for newly public firms. Journal of Accounting and Economics, 2004, vol. 37, iss. 1, pp. 113–136. URL: Link
Mo P.L.L., Rui O.M., Wu Xi. Auditors' Going Concern Reporting in the Pre- and Post-Bankruptcy Law Eras: Chinese Affiliates of Big 4 versus Local Auditors. The International Journal of Accounting, 2015, vol. 50, iss. 1, pp. 1–30. URL: Link
Robu M.A., Robu I.B. The influence of the audit report on the relevance of accounting information reported by listed Romanian companies. Procedia Economics and Finance, 2015, vol. 20, pp. 562–570. URL: Link00109-4
Kanagaretnam K., Chee Yeow Lim, Lobo G.J. Auditor reputation and earnings management: International evidence from the banking industry. Journal of Banking & Finance, 2010, vol. 34, iss. 10, pp. 2318–2327. URL: Link
Magnis C., Iatridis G.E. The relation between auditor reputation, earnings and capital management in the banking sector: An international investigation. Research in International Business and Finance, 2017, vol. 39, part A, pp. 338–357. URL: Link
Terinte P., Onofrei M., Firtescu B. Internal audit implications on bank profitability: The Romanian case. Annals of the University of Oradea, Economic Science Series, 2016, vol. 25, iss. 1, pp. 790–799.