The Dodd-Frank Act expands bank managers’ reporting requirements to federal agencies, particularly relating to banks’ financial losses should common market and macroeconomic shocks occur. To comply with this regulation, bank managers have engaged in consulting arrangements (referred to as regulatory consulting). We examine the financial reporting quality implications associated with hiring external auditors for these services. We find banks with auditor-provided regulatory consulting, relative to banks without, have higher financial reporting quality as measured by loan loss provision validity. Consistent with knowledge spillover benefits accruing to financial audit teams, we find more pronounced effects in the fourth versus interim quarters and more frequent income-reducing Y9-C restatements. We also find auditor responsiveness to PCAOB inspections improves the effectiveness of regulatory consulting. Overall, our results suggest regulatory consulting improves the audits of estimates in judgmental financial statement accounts, despite regulatory concerns that these services may impair auditor independence.

We use unique disclosures in the insurance industry to examine whether client-engaged specialists (i.e., external actuaries) affect opportunism within the claim loss reserve. Using a fixed-effects approach, we find that external actuaries significantly affect the opportunism in the claim loss reserve, approaching half the effect of the auditor. With respect to actuary characteristics, we find a positive (negative) association between actuary permissiveness (actuary size) and opportunism in the claim loss reserve. In additional analyses, we find that the relation between actuary permissiveness and claim loss reserve opportunism is stronger when insurers have incentives to opportunistically manage the claim loss reserve. This relation continues to persist in the presence of high-quality auditors. Overall, we provide evidence suggesting that client-engaged external actuaries can be used to support opportunistic claim loss reserve estimates.

A primary argument against fair value measurement is the lack of verifiability, where verifiability is defined as consensus in measurement by independent parties. We evaluate this argument by investigating trends in the consensus of reported fair values. Our findings indicate that consensus increased between 2005 and 2019, as evidenced by reductions in the fair value range and standard deviation. Further analyses suggest that enhanced data availability—driven by public dissemination of trade information—serves as a mechanism for this trend. We also document that securities subject to testing by larger external auditors with more resources to take advantage of enhanced data availability are associated with a stronger trend in increasing consensus. Finally, this trend appears to be stronger in situations when management has a heightened opportunity to record a biased estimate. While conventional arguments express concern over management’s ability to manipulate fair values, our results demonstrate patterns consistent with improved verifiability.