This paper reviews studies that have examined how accounting information impacts commercial lending judgments. Issues discussed involve the usefulness of accounting data in lending decisions, effects of different accounting methods on lenders’ judgments, bankruptcy and default judgments, and decision processes pertaining to the use of accounting information in lending decisions. Additionally, the paper reviews the research on how audits and other forms of assurance influence commercial loan officers’ judgments. Topics include the way perceived auditor independence influences loan officers’ judgments, the impact of financial statement audits and audit opinions on lending decisions, how internal control reports and other CPA firm reports influence loan decisions, ways in which audit report disclosures and wording impact lending decisions, how perceived auditor quality affects lending decisions, and the effects of limited assurance engagements on loan officers’ judgments.

IMPACT OF ACCOUNTING INFORMATION ON LENDING

Usefulness of Accounting Data General Issues Some studies have addressed very general issues involving the usefulness of accounting data in lending decisions. These issues include reliability of accounting data, the use of generally accepted accounting principles (GAAP), aggregation of accounting data, and interactions of accounting data valence with borrowers’ character traits. Holder-Webb and Sharma (2010) show that lenders’ perceived reliability of financial reports is a factor in their lending decisions. As well, DeZoort, Holt, and Taylor (2012) demonstrate the financial reporting reliability is negatively related to lenders’ assessments of loan default risk. These results are hardly surprising. Interestingly, however, Holder-Webb and Sharma (2010) find that the perceived reliability of financial reports is not affected by the applicant’s corporate board strength or by its financial condition. Financial reporting reliability is generally viewed as being enhanced when financial reports adhere to established standards. Gopalakrishnan, and Parkash (1995) find that 90 percent of the lenders they surveyed indicated that lending agreements consistently refer to GAAP. Williams, Chen, and Tearney (1991) found that three of four GAAP accounting standards examined (accounting for leases, deferred taxes, and compensated absences) were significantly more relevant to bankers than their respective non-GAAP alternatives. In contrast, the accounting for interest on construction loans did not matter as to whether GAAP was followed. No studies have examined issues unique to International Financial Reporting Standards. Some studies have examined various characteristics of accounting information. AbdelKhalik (1973) examined the effects of aggregated versus disaggregated accounting information on lending decisions. Results showed that when the financial situation of the borrower is marginal, the disaggregation of its financial information provides lenders with better risk indicators, so more detailed financial reports are preferred. Addressing the valence of accounting information, Beaulieu (1994) found that when accounting facts are positive (i.e., supporting loan approval), the rate of loan approvals is affected by borrowers’ character traits, but when accounting facts are negative, loan approval rates are unaffected by character traits.