Do client dependence and amount of audit fees affect lending decisions?

Abstract

Purpose

The objective of this paper is to examine whether lending decisions are affected by knowledge about the auditor's revenue dependence on a client and whether the amount spent by a company on audit fees (AF) affects lending decisions concerning the company.

Design/methodology/approach

The approach used is a behavioral experiment where risk assessments and lending decisions are made by bank loan officers for four hypothetical lending scenarios.

Findings

The paper finds that loan officers' decisions are not affected by knowledge about the size of a client's AF or by the auditor's revenue dependence on a client.

Research limitations/implications

Lending officers typically obtain more information about a prospective borrower than is provided in the research questionnaire. As well, economic incentives such as being fired for making poor lending decisions are absent in the paper. Also, the AF variable is subject to two divergent interpretations.

Practical implications

Lenders need not be provided with information about the size of an applicant's AF or the auditor's revenues received from the applicant in relation to its total revenues.

Originality/value

While each of these two issues (revenue dependence and AF size) has been addressed in prior research studies, no study has examined both of these aspects of audit quality together.

Citation

Schneider, A. (2010), "Do client dependence and amount of audit fees affect lending decisions?", Managerial Auditing Journal, Vol. 25 No. 5, pp. 444-457. https://doi.org/10.1108/02686901011041830