Are Lending Decisions Influenced by Knowledge About a Loan Applicant’s Internal Auditing?

• In Event: Accounting and Society

Abstract

This study examines whether knowledge about a loan applicant’s internal audit function affects commercial loan decisions. An experiment was conducted with 61 commercial lending officers, who provided risk assessments and lending probabilities for a hypothetical loan applicant company. The independent variable, the company’s internal audit function, was manipulated using three levels – no internal auditing, weak internal auditing, and strong internal auditing. Results show that lenders’ risk assessments are not influenced by a borrower’s internal audit function, but the likelihood of approving loans is positively impacted. More specifically, the existence of an internal function enhances the probability of loan approvals, although the strength of the internal audit function does not appear to have an impact.

Author

• Arnold Schneider, Georgia Institute of Technology