Audit Reports and the Loan Decision: Actions and Perceptions.

Auditors may become associated with the annual financial information of their nonpublic clients by performing compilations, reviews, or audits. This paper presents the results of an empirical study in which bank loan officers evaluated simulated loan applications which were accompanied by either a compilation report, a review report, an audit report, or no auditor report. The loan officers first decided whether to grant the loan and determined an appropriate interest rate. Second, they evaluated the financial statements' information on three quality attributes: freedom from clerical errors, freedom from effects of fraud, and compliance with GAAP. Multivariate and univariate statistical analyses suggest that audits are perceived to be of higher quality than are compilations, reviews, or statements with no auditor association. Due possibly to the limited number of subjects, no statistically significant differences were noted in decisions concerning the granting of the loan or its interest rate.