the ability to isolate changes in financial reporting due to internal controls regulation. In their study evaluating the effectiveness of SOX internal controls regulation, Hochberg et al. (2009) point out that “the central challenge to distinguishing between the two main views is the lack of a control group of firms unaffected by the legislation.”The internal control provisions of the Federal Deposit Insurance Corporation Improvement Act of 1992 (FDICIA) facilitate meeting this “control group” challenge by exempting some firms from these provisions. In the absence of an explicit exclusion, the FDICIA provisions apply to all insured depository institutions1.Such an exclusion exists for the FDICIA internal control provisions, in contrast to all other FDICIA provisions. FDICIA exempts institutions with assets less than $500 million from its internal control monitoring and reporting requirements. Specifically, these institutions are exempted from FDICIA’s requirements that management issue a report on the effectiveness of internal controls over financial reporting, and that their independent public accountant attest to management’s report. This exemption provides a control group unaffected by the internal control legislation, but otherwise similarly affected by the remaining FDICIA provisions. We examine the relative impact of this regulatory shift in internal control systems monitoring on financial reporting quality for the average affected versus unaffected firm.
We compare annual and quarterly financial reporting of bank holding companies (banks) affected by FDICIA’s internal control provisions to that of unaffected banks. Specifically, we examine changes in: the validity of the loan loss provision, earnings quality, benchmark-beating, and accounting conservatism. We analyze two samples, (1) a sample of U.S. public and private banks included in the Fed Form Y9-C Regulatory Filing database and (2) a sample of publicly-traded banks included in the COMPUSTAT database2. Our difference-in-differences research design isolates the effects of the FDICIA internal controls provision by controlling for changes in financial reporting unrelated to those provisions. We validate our control samples by testing for differences between the affected and unaffected firms in the pre-regulation period.本文来自优.文~论^文·网原文请找腾讯752018766
We argue that in addition to providing a control sample, our setting has several advantages for examining how internal controls regulation affects financial reporting. First, the
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论文范文http://www.chuibin.com/ effective date of FDICIA enables a long-range study of the impact of the first regulatory enforcement of COSO-based internal control provisions, which have served as the cornerstone of future regulation. The relationship between FDICIA and
SOX internal control reforms has been well documented, with Securities and Exchange Commission (SEC) Chairman Cox (2007) declaring that “FDICIA was a ’clear antecedent’ to the SOX internal control reforms.” Second, focusing on a single industry allows us to isolate and examine changes in the validity of the account
1 While FDICIA regulations did bring Savings and Loans (S&Ls) under the auspices of the FDIC, this study examines the impact of FDICIA-mandated internal control provisions on commercial banks.
2 Although FDICIA applies at both the bank and holding company levels, we focus on holding companies to increase comparability between our Regulatory and COMPUSTAT analyses.
most likely affected by internal control deficiencies, the loan-loss provision, and to explore how account-specific changes lead to more general changes in financial reporting. Third, our examination of all firms affected by the regulation, rather than only those most likely to benefit from the regulation (i.e. those with material internal control weaknesses), allows us to make an unbiased assessment of the financial reporting impact of the regulation on all affected firms. Finally, our comparison of the interim quarters to the fourth quarter allows us to assess whether the extent of auditor presence substitutes for internal controls regulation.
We compare the change in financial reporting for our affected and control firms in the seven-year periods before and after the passage of FDICIA. First we examine the properties of the annual financial reports. We find that the FDICIA-mandated internal control requirements lead to improvements in the validity of the loan-loss provision. Specifically, the association between the loan-loss provision and actual loans written off for affected banks strengthened in the period after the enactment of FDICIA. This improvement addresses the GAO’s (1994) concern “that banks’ loan-loss allowances included large supplemental reserves that were not linked to analysis of loss exposure or supported by evidence.” We find a corresponding increase in both earnings’ persistence and ability to predict cash flows, and a reduction in the use of earnings management to report positive earnings growth, suggesting that reducing supplemental reserves generally improves reporting quality. However, we also find that earnings conservatism declines for affected versus unaffected banks in both samples. This reduction in conservatism is also consistent with a reduction in supplemental reserves.
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