The impacts of stricter bank supervisions and regulations on external audit in the European banking system

Abstract

Perceiving that banking regulations and supervisions might not only exacerbate managerial discretions at financial institutions, but also render the estimates on bank exposures more complicated, it is probable that the governmental interventions could have repercussions for the quality of audited accounting information or the quality of external audit. Motivated by this dispute, the research, via full-sample panel-data analysis, aims to answer the questions of whether and how the implementations of international banking regulations and supervisions have influenced the quality of external audit in the EU banking system from 2001 to 2019. In addition, the research also seeks to discover the impact of the Single Supervisory Mechanism (SSM) in the European banking system by carrying out difference-in-difference estimations between significantly and less significantly supervised banks, as well as sub-sample panel-data estimations to measure the effect on audit quality. The research finds that the EU’s stringency in capital regulations has adversely affected audited information’s quality and made auditing costs less effective regarding LLPs. However, the capital requirements in Basel III have proved effective and moderately helpful in increasing audited information’s quality. Other findings show that for most of the factors influencing external audit’s quality, there were differences between the two groups of banks and that the SSM scheme has helped improve external audit’s quality by constraining discretionary capital practices at the significant banks, despite also making both audit and non-audit services less effective in improving audited information’s quality. The findings suggest that for both groups of banks, having their providers of both audit and non-audit services under governmental supervision might be beneficial, given that this costs less than direct supervision from the ECB.