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    A Test of the Auditor Reliability Framework Using Lenders’ J...
    research summary posted February 24, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 04.0 Independence and Ethics, 04.08 Impact of SEC Rules Changes/SarbOx 
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    Title:
    A Test of the Auditor Reliability Framework Using Lenders’ Judgments
    Practical Implications:

    The results of this study indicate that banning the provision of both non-audit and audit services by a single firm likely increased perceptions of auditor independence, but did not significantly effect overall judgments of reliability or the extent to which financial statement users incorporate financial statement information into their decision process. Additionally, results of this study indicate that companies who have audits performed by auditors who are perceived to possess greater integrity, expertise and independence likely enjoy reduced costs of borrowing.

    For more information on this study, please contact F. Todd DeZoort.

    Citation:

    DeZoort, F.T., T. Holt, and M.H. Taylor. 2012. A test of the auditor reliability framework using lenders’ judgments. Accounting, Organizations and Society 37 (8): 519-533.

    Purpose of the Study:

    The purpose of this study is to test the relationship between financial statement users’ perceptions of auditor expertise, integrity, independence and objectivity and overall assessments of auditor reliability. Previous research suggests that perceptions of auditor reliability are critical to perceptions of financial statement reliability. This study directly tests that assertion and also investigates the relationship between perceptions of financial statement reliability and subsequent reliance on disclosed financial information. 

    Design/Method/ Approach:

    Data for this study was collected via a survey of commercial lenders belonging to the Risk Management Association prior to 2012. The survey yielded 187 responses and required participants to review financial information for a hypothetical company. Participants responded to several questions about their perceptions of the company’s auditors, the financial statements and overall risk as a potential applicant for a commercial loan.

    Findings:

    This study investigates the relationship between financial statement users’ perceptions of auditor expertise, integrity, independence and objectivity and makes the following observations:

    • Perceptions of auditor integrity are positively correlated with perceptions of auditor independence, expertise, objectivity and reliability
    • Perceptions of auditor expertise are positively correlated with perceptions of auditor objectivity
    • Perceptions of auditor independence are positively correlated with perceptions of objectivity
    • Perceptions of auditor objectivity are positively correlated with perceptions of auditor reliability.

    This study also investigates how perceptions of auditor reliability influence financial statement users’ interpretation and use of financial statement information.

    • Perceptions of auditor reliability are positively correlated with perceptions of financial statement reliability
    • Perceptions of financial statement reliability are negatively correlated with judged risk of default on a commercial loan

    Finally, manipulating whether or not the auditor provided non-audit services in addition to performing the financial statement audit had the following effects:

    • Negatively impacted perceptions of auditor independence, objectivity and reliability
    • Did not statistically impact perceptions of auditor integrity, expertise, financial statement reliability or default risk
    Category:
    Independence & Ethics, Standard Setting
    Sub-category:
    Impact of SEC Rules Changes/SarBox