The Effects of Explicit Clarification of Auditor Responsibility for Error or Fraud on Lenders’ Perceptions of Audit Quality and Loan Decisions

• In Event: Dialogue 1

Abstract

We examine the impact of an explicit clarification of auditor’s responsibility for error or fraud on commercial lenders’ perceptions of auditors’ extent of audit tests done, confidence that material fraud or errors will be detected, lending risk assessments, and loan decisions. In addition, we investigate whether audit firm type plays a role concerning the aforementioned variables. We analyze responses of 170 commercial lenders. Results indicate that explicit clarification improves perceptions of (1) the extent of audit tests done for fraud or error, (2) confidence that material fraud or errors will be detected, and (3) the probability that commercial lenders will lend. All results hold regardless of audit firm type (Big Four or National Non-Big Four). The findings have strong implications for policy making, practice, and research.

Keywords: auditor report; whether due to error or fraud, commercial lenders; loan decisions.

Authors

• Xia Zhang, Alabama A&M University

• Kayla Denise Booker, Rhodes College