An Internal Control Opinion and Loan Officers’ Risk Assessments and Decisions: The Moderating Role of an Auditor Independence Clarification

• In Event: Auditing--Internal Control

Abstract

Integrating an auditor independence clarification into an auditor’s report is required in a new standard issued by PCAOB in 2017. This study conducts an experiment with 98 loan officers to examine whether an auditor independence clarification affects loan officers’ lending risk assessments and their decisions when it is integrated with an unqualified financial statements audit opinion and an unqualified or adverse opinion on internal control over financial reporting, respectively. The results indicate that an auditor independence clarification moderates the relationship between an internal control opinion and loan officers’ lending risk assessments and decisions. Loan officers perceive higher lending risk assessments and have a lower intent to lend to an entity with an adverse internal control opinion than an entity with an unqualified internal control opinion. When an auditor independence clarification is integrated in an auditor’s report, the aforementioned relationships are more pronounced as compared to no clarification. These findings provide empirical evidence to confirm the informative value of an auditor independence clarification and support PCAOB’s expectation to enhance public users’ understanding of the auditor's independence obligations.

Authors

• Botao Chen, University of Maryland Eastern Shore

• Quinton Booker, Jackson State University