Information content and recency effect of the audit report in loan rating decisions

Abstract

We examined the significance of the audit report in loan rating decisions using the belief revision model. We designed a laboratory experiment where the sign of the audit report is mixed with other annual financial information in a series of sequential evidence. The results of an experimental design, using 106 loan officers from international financial institutions, support the hypothesis that the qualified audit report appears to be an independent and useful piece of evidence when it is contrary to favourable financial expectations. Our findings also support that the 'recency effect' might influence international commercial loan officers' perception of the qualified audit report. Copyright (c) The Authors Journal compilation (c) 2007 AFAANZ.

The relevance of financial information and contents of the new audit report for lending decisions of commercial banks

“…This is one of the reasons why loan officers are considered among the principal users of financial information who are most affected by the credibility of audit reports and their interpretation in loan granting decisions (Guiral-Contreras et al, 2007). But bankers and loan officers reported different importance and usage of accounting information and audit report through the time.…”

“…Regarding the audit opinion expressed in audit report, loan officers give no importance to an unqualified audit report if they receive other financial information that is unfavourable towards the client requesting credit, or they are prepared to change a previously favourable attitude when faced with adverse opinions expressed by the auditors (Guiral-Contreras et al, 2007). In later situation, audit report act as 'red flag' that only alerts the loan officers to be more critical and severe in the conditions imposed on a loan when it contradicts the a priori favourable attitude by the loan officers vs. modified or adverse audit report.…”

“…Many researchers provided empirical evidence on the relevance of certain information in the audit report for the decision making of investors and creditors (Gay & Schelluch, 1993;Miller et al, 1993;Bamber & Stratton, 1997;Bartlett & Chandler,1997;Berry & Robertson, 2006;Guiral-Contreras et al, 2007). However, there were critics, both in academia and practice, on the usefulness of auditor's report for capital providers in dynamic business environment where entities are exposed to more risky and complex transactions.…”

Three essays on the effects of foreign direct investment on the host-country companies: An analysis in the private setting

“…In the same vein, Bamber and Stratton (1997) conduct an experiment and observe that bank loan officers find MAOs informative since they influence their risk assessment, loan interest premium, and decision to grant or deny a loan. In Spain, there is also experimental evidence that the audit report is useful in loan rating decisions (Guiral-Contreras et al, 2007;Guiral, Ruiz, & Choi, 2014). Recently, Chen, He, et al (2016) use a large sample of listed Chinese companies and observe that loans granted to companies after receiving an MAO are associated with higher cost of debt and likelihood of requiring collateral, smaller loan size, and shorter maturity.…”

“…This demand arises mainly from the needs of debt contracting. Bank loan officers consider that audited financial statements are more credible than non-audited financial statements (McKinley, Pany, & Reckers, 1985) and that audit reports are a primary financial information source (Guiral-Contreras, Gonzalo-Angulo, & Rodgers, 2007). Additionally, auditing fosters accounting accuracy since audited accounts are approximately half as likely as unaudited accounts to contain errors (Clatworthy & Peel, 2013).…”