Factors influencing non-compliance with ASU 2010-06 in the banking industry

Abstract

Purpose

This study aims to examine whether banks are compliant with the Financial Accounting Standards Board’s standard Accounting Standards Update (ASU) 2010-06 requiring disaggregated fair value hierarchy information. It also identifies institutional and firm-specific factors that are associated with compliance or non-compliance.

Design/methodology/approach

Using quarterly reports of banks for the first quarters of 2009 (pre- ASU 2010-06) and 2010 (post- ASU 2010-06), we hand-collect information on disclosures about fair values from the footnotes. Using a logistic regression with compliance/non-compliance as the dependent variable, we examine factors associated with compliance/non-compliance.

Findings

Results show that 23 per cent of banks do not comply with ASU 2010-06 and that the non-compliant banks tend to be small, lack effective internal controls and are more likely to be audited by non-specialist auditors.

Research limitations/implications

This study only considers one type of non-compliance with ASU 2010-06, i.e. whether or not firms provide disaggregated fair value hierarchy information. There may be other forms of non-compliance that the authors do not examine because of the difficulties involved in objectively defining non-compliance.

Practical implications

The findings suggest firms may need to increase training for internal personnel and hire high-quality auditors for ensuring compliance with fair value accounting rules. The authors also suggest that smaller firms may find compliance to be onerous and recommend additional research to examine whether smaller firms should be exempted from some or all of the fair value rules.

Originality/value

This study provides some of the first evidence on the level of compliance with mandated fair value disclosures.

Citation

(Richard) Lu, H.-Y. and Mande, V. (2014), "Factors influencing non-compliance with ASU 2010-06 in the banking industry", Managerial Auditing Journal, Vol. 29 No. 6, pp. 548-574. https://doi.org/10.1108/MAJ-08-2013-0928