Earnings management by mutual saving banks using bad debt expenses and/or loan loss provisions
Asian Tax Journal Vol. 6 No. 2 (2005), pp. 67-85
Abstract
Customers and deposits are very important for a bank's survival. This is why mutual saving banks would not want to report earning decreases which may damage their external credit worthiness. It is also very important for the banks to keep a certain level of BIS capital adequacy ratio which is a major factor checked by the Financial Supervisory Board for the credit worthiness of mutual saving banks. Therefore, it is possible for the mutual saving banks to manage their reported earnings and BIS capital adequacy ratio by making use of their accounting discretion. Most mutual saving banks have some discretion in recording bad debt expenses. The purpose of this study is to verify whether mutual saving banks manage their reported earnings and BIS capital adequacy ratios by adjusting bad debt expenses and/or loan loss provisions. The results of this study show that mutual saving banks report smaller bad debt expenses if their current year's profits is smaller than prior year's or if it is below average. However, this study could not support the hypothesis that mutual saving banks, which have lower BIS capital adequacy ratio comparatively, will report smaller loan loss provisions. This study makes a contribution to our knowledge in that it provides some evidences that mutual savings banks could pursue earnings management using loan loss provisions.
Keywords
- Earnings management
- BIS capital adequacy ratio
- Loan loss provisions
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