{'fraction_non_alphanumeric': 0.015561015561015561, 'fraction_numerical': 0.001638001638001638, 'mean_word_length': 5.605405405405405, 'pattern_counts': {'":': 0, '<': 0, '<?xml version=': 0, '>': 0, 'https://': 0, 'lorem ipsum': 0, 'www.': 0, 'xml': 0}, 'pii_count': 0, 'substrings_counts': 0, 'word_list_counts': {'cursed_substrings.json': 0, 'profanity_word_list.json': 0, 'sexual_word_list.json': 0, 'zh_pornsignals.json': 0}}
Voluntary Audits and Bank Failure: Do financial statement audits constrain excessive risk taking?

In this study, we address whether financial statement audits mitigate potentially value-reducing managerial risk-taking. Prior research identifies associations between financial statement audits and perceived credit risk, but surprisingly few studies assess whether lower perceived risk translates into fewer negative riskrelated, operational outcomes such as defaults. Using a sample of privately held commercial banks, we find having a voluntary financial statement audit is associated with a 38% decrease in the likelihood of credit defaults, operationalized as bank failure. Our results are robust to limiting our sample to banks matched on propensity to obtain an audit. We also find no differential effect between mandatory and voluntary audits, providing further evidence that the association between audit and reduced likelihood of failure is due to having an audit, rather than choosing to have an audit. The finding that audit procedures are associated with a reduction in undesirable risk-taking should be important for regulators and other stakeholders as they weigh the costs and benefits of mandatory audits.