The Effect of the Expected Credit Loss Model on Audit Quality: Evidence from the European Union Banks

This study aims to investigate the effect of the expected credit loss (ECL) model under IFRS 9 on audit quality. We focus on the banking setting since IFRS 9 has particularly affected reporting requirements in such industry. Our results using difference-in-differences research design show that banks adopting the ECL model exhibit significantly higher audit quality compared to other banks. This is consistent with the notion that the forward-looking provisioning under the IFRS 9 impairment has encouraged auditors to exert greater effort in their services. Further analyses also reveal that (a) auditor specialization mediates the association between the ECL adoption and audit quality; (b) the positive effect of the ECL model on audit quality is less pronounced for banks that have greater incentives to manage earnings. Collectively, this study offers novel insights into prior research that has examined the impact of the ECL model in the banking industry. Additionally, it provides important implications for regulators and other parties interested in understanding the effects related to the adoption of the standard IFRS 9.