PhD Dissertation Defense - Radhika Majeji

DISSERTATION DEFENSE ANNOUNCEMENT

FOR THE DEGREE OF PHD IN ACCOUNTING

 

PhD Candidate: Radhika Majeji

Title: Accounting for Credit Losses: Evidence on Anticipation, Implementation, and Institutional Consequences of CECL.

Date & Time: Wednesday, September 2^nd, 2026, 2:00pm – 4:00pm EST

Location: Smith 122 or via remote connection

Remote Connection: https://bentley.zoom.us/j/96465389915

Dissertation Committee Chair: Gopal V. Krishnan, Trustee Professor of Accounting, Bentley University.

Committee Members: Ahmet Kurt, Associate Professor of Accounting, Bentley University; Changjiang Wang, EY Professor of Accounting, University of Cincinnati.

ABSTRACT

 

Loan loss provisioning is central to bank accounting. It impacts banks’ earnings, risk management, regulatory capital, and financial stability. Historically, loan losses were recognized using the Incurred Loss (IL) model, which is backward-looking. Under the IL model, loan losses are recognized only when losses are probable, based on a threshold informed by past events and current financial conditions. This reactive approach delays the recognition of credit losses and increases the procyclicality of lending, as the provisions remain low during economic booms and spike during downturns, which increases financial volatility. Research suggests that this was one of the primary reasons for the financial crisis of 2007–08. In response to the crisis, the Financial Accounting Standards Board (FASB) introduced “ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This standard replaced the incurred loss model with a forward-looking framework that requires firms to estimate expected credit losses using historical information, current conditions, and reasonable and supportable forecasts of future economic conditions. This approach, commonly referred to as the Current Expected Credit Losses (CECL) model, represents a fundamental shift in how banks measure and report credit risks.

 

My dissertation consists of two archival studies and one systematic literature review that examine the anticipation and implementation effects of CECL. Collectively, these studies investigate how the transition to CECL has influenced banks’ reporting behavior, assurance choices, and internal control reporting, providing new evidence of the economic consequences of this major accounting standard change.

 

The first paper (sole-authored) is a systematic literature review that examines the growing empirical evidence on the expected credit loss accounting, focusing both on the CECL model in the United States and IFRS 9 internationally. Although these standards share a common objective of improving the timeliness of credit loss recognition, the related literature remains fragmented across studies that differ in research design, institutional setting, and outcomes examined. Using a systematic review methodology, this study classifies prior studies by research focus and documented effects, covering themes such as financial reporting quality, earnings and capital management, procyclicality and lending behavior, regulatory capital and supervisory oversight, and the information environment. I find that both standards improved provisioning timeliness relative to the incurred loss model, but each introduced new tradeoffs: CECL's unconditional lifetime recognition produced provision volatility, while IFRS 9's staged approach reduced comparability and increased staging discretion. Neither standard eliminated earnings nor capital management, as discretion relocated from recognition timing to scenario selection and staging determination, and both partially reduced procyclicality while introducing new forms of it. Both standards also produced spillovers beyond the banking sector that the incurred loss literature never documented. Together, these findings establish a comprehensive foundation for understanding how and why ECL standards produce the outcomes they do across different institutional contexts, while highlighting that most existing evidence comes from an unusual 2018–2022 period whose steady-state generalizability remains untested.

 

The second paper (co-authored with Gopal Krishnan and Changjiang Wang) examines whether there was an increase in the demand for non-audit services by banks during the CECL anticipation period. CECL was introduced through a phased regulatory process, with the initial announcement in 2015 and mandatory adoption for most SEC filers in the first quarter of 2020. This staggered timeline allows us to study anticipation effects by comparing the CECL transition period (2016–2018) to the pre-transition period (2013–2015). CECL has direct implications for regulatory capital; therefore, we identify the treatment and control groups based on banks’ Tier-1 capital ratio relative to comparable peers. We find that capital-constrained banks (treatment banks) experience approximately a 28 percent increase in non-audit fees during the transition period relative to less constrained banks (control banks). This result is robust to firm and year fixed effects, entropy balancing, and control for lagged non-audit fees. Cross-sectional analyses suggest that this increase is concentrated among banks with more heterogeneous loan portfolios, banks audited by non-Big 4 auditors, banks with a higher number of non-bank subsidiaries, and banks with internal control weaknesses in the current or prior year. Overall, these results suggest that the transition to ASU 2016-13 is associated with significant costs in the form of non-audit services for banks with higher capital constraints than their less constrained peers.

 

The third paper (co-authored with Gopal Krishnan and Changjiang Wang) examines the impact of CECL implementation on the reporting of internal control weaknesses. In 2019, the FASB announced that all SEC filers, excluding small reporting companies, were required to adopt CECL in the first quarter of 2020, while small reporting companies and non-public entities were granted additional time until 2023. Using a difference-in-differences design, we find that banks that adopted the CECL standard in the first quarter of 2020 are more likely to report a material weakness in internal control under Section 302 of SOX than a sample of banks that did not adopt CECL in the first quarter of 2020. This effect is concentrated in banks that are subject to greater external monitoring, are larger, audited by Big Four auditors, have higher non-performing loans, and hold more heterogeneous loans. Parallel-trend analysis supports the validity of the identification strategy and shows that the increase in reported internal control weaknesses is largely confined to the adoption year, suggesting that banks undertake actions to mitigate the challenges of CECL adoption on internal controls.