An examination of the effect of CPA firm type on bank regulators' closure decisions

This study examines the effect of CPA firm type on regulators' decisions wi th respect to the closure of banks. Using a sample of 116 closed and 116 no nclosed banks in the state of Texas during 1990-1991, we estimate regressio n models which include (1) financial characteristics of the sample banks, ( 2) other characteristics of the sample banks, (3) the type of auditor's opi nion received by the bank (with respect to the bank's ability to continue a s a going concern), and (4) the CPA firm type (Big 6 vs. non-Big 6). Our re sults indicate that banks receiving modified opinions from Big 6 firms were more likely to be continued (not closed) by regulators than those receivin g modified opinions from non-Big 6 firms. In contrast, banks receiving nonm odified opinions from non-Big 6 firms were more likely to be closed than th ose receiving nonmodified opinions from Big 6 firms. These findings indicat e that, ceteris paribus, banks audited by Big 6 firms are more likely to be continued, consistent with regulators' perceptions that economic reporting incentives may result in Big 6 firms being more likely to modify their opi nions to reflect going-concern uncertainties.