Third Party Monitoring, Regulatory Compliance and Financial Reporting: Evidence from Banking

Confidential examination files show that the likelihood of a bank to voluntarily choose to be externally audited under internal controls is positively associated with disciplinary actions imposed against it by supervisors and that such actions seldom involve financial reporting. This identifies a broad role for third party monitoring in the governance of regulated entities. A narrow role in influencing financial reporting quality, on the other hand, is evidenced in structured interviews with bank examiners.