The Impact of Auditor Size and Auditor Tenure on Banks’ Income Smoothing in Developing Countries: Evidence from Vietnam



Income smoothing is intentional alteration of a company’s earnings by its management in order to reduce the fluctuations in the company’s reported profit, resulting in a biased presentation of the related financial statements. Previous studies in Vietnam and other countries have found evidence of banks smoothing their income by adjusting provisions for loan loss. The purpose of this paper is to examine the impact of auditor size and auditor tenure on income smoothing practice through loan loss provisions by Vietnamese commercial banks. Based on a sample of 21 Vietnamese banks during the selected period from 2008 to 2017, the findings show that Vietnamese banks smooth their earnings through loan loss provisions. However, Big 4 auditors do not show a significant impact on reducing this income smoothing, while there is moderate evidence that long auditor tenure has a mitigating effect on this kind of earnings management. The results of the study are consistent with prior empirical evidence that find longer auditor tenure having an impact on reducing earnings management, whereas big audit firms do not always make a difference from other audit firms in relation to constraining earnings management, especially in the context of a developing country with a relatively weak audit environment. The study results have significant implications for the regulators and standard setters in developing a strong environment for the audit profession.