The Effects of Auditor Rotation on Loan Officers’ Perceptions and Decisions:

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 18: Auditor Rotation

Abstract

The purpose of this study is to determine whether loan officers’ perceptions and decisions are affected by the type of auditor rotation implemented for a nonpublic company. Specifically, does the type of auditor rotation influence loan officers’ perceptions of 1) auditor independence and 2) financial statement accuracy and reliability, and decisions of extending a loan?
Answering this question is important because many Sarbanes-Oxley provisions cascade onto nonpublic companies, and several countries have implemented or debating on implementing some type of auditor rotation that applies to nonpublic companies.
Utilizing a between-subjects experiment, I find that the analysis of variance (ANOVA) results fail to find support that loan officers are more confident that the auditor is independent when there is firm rotation vs. partner rotation vs. no rotation. Furthermore, the results fail to find support that loan officers are more confident that the audited financial statements are free from unintentional misstatement or omissions between the experimental conditions. However, the results suggest that loan officers are more confident that the audited financial statements are free from intentional misstatement or omissions when there is partner or firm rotation compared to no rotation. Additionally, the Chi-Square results suggest that loan officers are more likely to approve a loan when there is partner rotation compared to no rotation or firm rotation. However, ANOVA results fail to indicate that loan officers’ probability to extend a loan differs between the experimental conditions.

Author

• Adrian LaTarus Mayse, Howard University