Limited Liability Agreements: Bankers' Perceptions, and Effects on Loan Decisions

• In Event: Auditor Liability

Abstract

This study investigates whether bank loan officers’ perceptions of auditor independence, objectivity, professional skepticism, and audit quality are impacted when auditor liability is limited through the use of limited liability agreements (LLAs). Additionally, this study explores the impact LLAs have on loan officers’ loan decisions. I employ a between-subjects experiment using 107 bank loan officers. Overall, the analysis of variance (ANOVA) results support the hypotheses that bank loan officers’ perceptions of independence, objectivity, and professional skepticism, and audit quality decline when the auditor’s legal liability is limited through the use of LLAs. Moreover, the ANOVA results indicate that the risk assessment measure and the interest rate measure for bankers’ loan decisions are negatively impacted which support the hypotheses. Finally, I provide evidence to support the Securities Exchange Commission position prohibiting the use of LLAs. The results demonstrate that perceptions of auditor independence, objectivity, professional skepticism, and audit quality are negatively impacted by the use of LLAs in the audit client engagement letter. Additionally, this study finds that limiting auditor liability may have a negative impact on loan decisions. Ultimately, third party knowledge of auditor liability or limitations in liability may negatively impact perceptions and decisions.

Author

• Aisha G. Meeks, Dalton State College