Running head: COMPARISON OF THE RELATIONSHIP BETWEEN BANKING AND ACCOUNTING 1

Comparison of the Relationship between Banking and Accounting

University of The Bahamas

Natalie Charles

BADM 498

Dr. Kelly Duncanson

September 18th, 2022

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According to the articles, the banking industry is crucial for global and national

economies. The banking industry is be used to assess earnings management. As discussed in the

article “Relationship between banker and accountant,” information is the focus of accounting

where the accounting professionals must gather, arrange, and evaluate the constantly-changing

information that businesses receive in a way that makes sense (Head, 1924). The majority of the

time, when people think about accounting, they first think of financial reporting, but this is only

the beginning. There are several fields, including audit, tax, forensic accounting, and more.

Although most accountants are at least somewhat familiar with finance, accounting is not

banking. According to the article “Thoughts on financial accounting and the banking industry,”

Bushman (2014) notes that through two distinct accounting channels, managerial control over

accounting decisions can harm bank stability: through the accounting numbers themselves,

which are used as a quantitative input in regulatory calculations, and through bank transparency,

which can boost financing frictions and weaken market control over bank risk-taking. These

hypotheses are logical and tenable, and the research assumptions employed included significant

econometric steps to address endogeneity issues and rule out other potential explanations for the

findings. However, opportunistic accounting decisions do not take place in a vacuum, and there

is likely a lot more going on than what has been discovered so far in banking studies.

Lobo (2017), notes that different authors confirm that banking remained profitable until

2007. However, things changed again after the financial crisis of 2008/2009. Also, banking has

different regulations which mainly affect internal control, auditing, and financial reporting.

However, the regulation allows for accountability. The exogenous shock caused by the crisis of

2008–2009 led to more research about financing and accounting. The author notes that the crisis

provides a test to financing and accounting, which also impact the business, economy, financial
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stability, and reporting choices. Accounting research in banking involves reporting discretion,

signaling, smoothing, risk-taking, capital management. The industry is interlinked, whereas

accounting and banking are interlinked (Lobo, 2017).

The article “Relationship between banker and accountant,” explains that currently,

accounting and banking are quite different professions with very different objectives (Head,

1924). The distinctions become apparent once you put aside the fact that both belong under the

“finance " category. Banking originally meant keeping money secure before lending it to make

money on the interest. To claim that this definition accurately captures everything that

contemporary banking comprises would be ludicrous, given how much banking has changed

over the past few decades. Commercial banking and investment banking are frequently

considered separate banking subsets. While investment banking typically refers to activities like

underwriting and providing M&A services for institutional clients, commercial banking typically

refers to managing deposits and loans. Although most of those who work in the banking sector

are familiar with accounting fundamentals, banking differs from accounting (Head, 1924).

According to the article, “Relationship between banker and accountant,” Head (1924)

notes that despite the expansion of cities and the emergence of powerful corporations, bankers

continued to engage personally with their loan-seeking clients. He handled them more officially.

He demanded financial records. He checked the veracity of the statements that had been made.

He was like an accountant. But as time went on, the complexity of company interactions and the

size of business divisions increased, necessitating the formation of specialists who made it their

mission to master a unique competency in financial statement analysis. These experts evolved

into the certified public accountants that we know today (Head, 1924).
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The article “Thoughts on financial accounting and the banking industry,” demonstrates

that their DELR-bank risk results are robust to include bank fixed effects, demonstrating

significant DELR variability within banks (Bushman, 2014). As a result, while it has been

demonstrated that banks' accounting decisions impact bank risk, the pressure on bank

management to make these decisions can originate from various sources. Executive remuneration

issues, career worries, personal benefits, and shareholder or regulatory concerns, among others,

may be motivating bank managers to opportunistically boost reported earnings in reaction to

downward pressure on bank profits or capital levels. Future research should focus on identifying

the underlying sources of pressure and how different sources of pressure differ in their effects on

the accounting and operational decisions made by banks.

In the banking industry, it is evident that accounting helps bankers to keep the assets,

revenues, and sales in check while serving the customers who vary greatly. The banking

industry, therefore, uses financial reporting to address interesting accounting issues. While the

article does not cover all the exciting questions that have been studied, it is clear that there is a

relationship between banking and financing or accounting. The article's author notes that

Bushman (2014) and Beatty and Liao (2014) outline detailed discussions showing that

accounting and banking are interlinked. The article offers a broad understanding of banking and

accounting research in banking. The article allows a deeper understanding of the business,

economy, financial stability, and reporting choices. Banking accounting research involves

reporting discretion, signaling, smoothing, risk-taking, and capital management (Lobo, 2017).

The topic of opportunistic accounting discretion in the article focuses almost entirely on

DELR. But when the bank is under pressure, bank managers probably have additional

accounting levers. Banks have access to various unique levers, which BL describes. As discussed
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in the article, banks with MBS levels overestimate the carrying value of their assets during the

crisis, defer loan loss provisions, and categorize MBS that are eligible for sale as held-to-

maturity. Future research might find it intriguing to formally represent bank accounting decisions

as a vector rather than as discrete procedures and look for connected accounting behavior

clusters.
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References

Bushman, R. M. (2014). Thoughts on financial accounting and the banking industry. Journal of

Accounting and Economics, 58(2-3), 384-395.

Head, W. W. (1924). Relationship between banker and accountant. Journal of Accountancy,

38(1), 1.

Lobo, G. J. (2017). Accounting research in banking: A review. China Journal of Accounting

Research, 10(1), 1-7.