Summary #3

The Effect of Auditor
Attestation and Tolerance for
Ambiguity on Commercial
Lending Decisions

What influences loan officers more: facts or feelings?

BY RONALD A. DAVIDSON AND MICHAEL E. WRIGHT

hen commercial lending officers make a loan decision, are they able to distinguish among different levels of attestation? Or is a personal characteristic such as their “tolerance for ambiguity”—the way people react to uncertain situations—an important factor in lending decisions?

In our research, we assume that loan officers make three sequential decisions in the loan evaluation process: estimating the level of risk associated with the loan, determining whether they should recommend the loan and deciding the interest rate to be charged. We also assume that the financial information provided by commercial loan applicants can be audited, reviewed or prepared by management with no involvement by auditors. The level of attestation should affect the perceived credibility—audited financial information should have the greatest credibility, while financial information prepared by management with no involvement of their accountants should have a lower level of credibility. Lenders’ tolerance level should affect how they react to an ambiguity, making them approve or reject the application.

Seventy-five commercial lending officers from a number of banks were asked to evaluate a realistic, hypothetical loan given different types of attestation. We found that the level of attestation had no effect on loan decisions, but personal tolerance for ambiguity did. A well-known psychological measure of tolerance for ambiguity was used.

The implications for practice are that loan officers may not adequately consider the credibility of financial information when evaluating commercial loans. Training may be warranted to teach loan officers the differences among audits, reviews and information that are prepared by management.

For the full text of the research paper, see Auditing: A Journal of Practice & Theory, Fall 2000, vol. 19, no. 2.

Ronald A. Davidson is associate professor at Arizona State University. His e-mail address is rdavids@asu.edu. Michael E. Wright is associate professor at the University of Calgary. His e-mail address is wright@ucalgary.ca

Summary #4

The Effects of Internal Audit
Outsourcing on Perceived
External Auditor
Independence

It’s not so much a question of outsourcing as it is one of personnel.

BY D. JORDAN LOWE, MARSHALL A. GEIGER AND KURT PANY

he accounting profession is attempting to redefine itself, in part by expanding the types of services it provides. This expansion of services has raised questions about whether CPA firms can maintain their independence and still provide an ever-increasing array of other types of services to audit clients. In this study we addressed financial statement user perceptions about CPA firms performing internal auditing outsourcing activities—an area in which CPAs are becoming increasingly involved.

One hundred and seventy-seven loan officers were furnished with a realistic loan application for a medium-sized retail grocery company and asked to evaluate auditor independence, assess the reliability of financial statements and make a loan decision. All loan application materials were the same across participants except for the description of the internal audit arrangement, which varied as follows:

1. Not outsourced, done in-house.
2. Outsourced to an external auditor other than the one that performed the company’s external audits.
3. Outsourced to its own external auditor—which performed management functions.
4. Outsourced to its own external auditor—same personnel used for the internal and external audits.
5. Outsourced to its own external auditor—different personnel used for the internal and external audits.

Loan officers receiving the case in which the external auditor performed management functions for the outsourced internal audit gave the case the lowest independence ratings, financial statement reliability scores and loan approval rate. In contrast, loan officers receiving the case where the internal audit was outsourced to the company’s external audit firm using different personnel not only had significantly higher ratings than when using the same personnel, but also uniformly had the highest perceptions of auditor independence and financial statement reliability and the highest loan approval rate. These results were consistent with the AICPA’s position of allowing external auditors to perform outsourced internal audit activities for clients as long as they did not perform management functions in connection with the internal audit. However, the results also show that perceived auditor independence and financial statement reliability could be enhanced by requiring CPA firms that perform internal audit services for audit clients to use different personnel for each type of engagement.

For the full text of the research paper, see Auditing: A Journal of Practice & Theory, vol. 18, Supplement, 1999.

D. Jordan Lowe is associate professor at the University of Nevada, Las Vegas. His e-mail address is dlowe@ccmail.nevada.edu. Marshall A. Geiger is associate professor of accounting at the University of Richmond. His e-mail address is mgeiger@richmond.edu. Kurt Pany is professor of accounting at Arizona State University. His e-mail address is kurt.pany@asu.edu.