Sp. Bandyopadhyay et Jr. Francis, THE ECONOMIC EFFECT OF DIFFERING LEVELS OF AUDITOR ASSURANCE ON BANKERS LENDING DECISIONS, Canadian journal of the Administrative Sciences Association of Canada, 12(3), 1995, pp. 238-249
Since 1979, Statement on Standards for Accounting and Review Services
No.1 allows CPAs to perform compilations and reviews, in addition to t
raditional audits for nonpublic companies. An experiment was conducted
to determine if these increasing levels of auditor assurance have an
economic effect on decision making by users of financial statements. A
hypothetical loan application was evaluated by 67 experienced bank lo
an officers with the level of auditor assurance manipulated across the
se three levels of assurance from low (compilations) to medium (review
s) to high (audits). The argument is that increasing levels of assuran
ce reduce information risk about the applicant and should therefore af
fect economic decision making. Loan officers made two decisions: wheth
er or not to make the loan and the interest rate over prime to be char
ged on the loan. The results indicate that on average loans were more
likely to be made and a lower interest rate charged as the level of as
surance increase: specifically the likelihood of making the loan incre
ased from 26% with compilations, to 48% with reviews, to 62% with audi
ts, while the interest rate premium was 2.24% for compilations, 1.96%
for reviews, and 1.71% for audits. These results are consistent with h
igher levels of assurance reducing information risk and having an econ
omic effect on the loan decision process. In addition, loan approval r
ates were higher and interest rates were lower for loan security via c
ollateralized assets relative to loan security via debt covenants. How
ever, neither loan approval rates nor interest rates were significantl
y different between provision of MAS by auditors versus no-MAS conditi
ons.