Is commercial lending affected by knowledge of auditor switches from Big 4 firms to regional firms?

Abstract

Purpose

This paper aims to examine whether knowledge about companies switching auditors from Big 4 firms to regional firms affects commercial lending decisions.

Design/methodology/approach

The approach used is an experiment where bank loan officers make judgments about risk and probabilities of granting a line of credit.

Findings

Neither risk assessments nor probabilities of granting credit differed for companies that switch auditors from Big 4 firms to regional firms as compared to companies that did not switch auditors. For companies that did switch auditors, providing a reason for the switch did not influence lending decisions.

Research limitations/implications

Lenders were given questionnaires that do not contain all of the information they may have used in actual loan decision settings. Also, the hypothetical nature of the decisions and incentives may not produce the responses that would be given in actual lending scenarios.

Practical implications

When applying for bank loans, companies need not be concerned about having switched auditors from Big 4 to regional firms. Also, companies that switch from Big 4 firms to regional firms need not worry about whether or not to provide a reason for the audit firm switch.

Originality value

This study adds to the auditor switching literature by investigating the effects of switches from Big 4 firms to regional firms on commercial lending decisions.

Citation

Schneider, A. (2017), "Is commercial lending affected by knowledge of auditor switches from Big 4 firms to regional firms?", Accounting Research Journal, Vol. 30 No. 2, pp. 153-164. https://doi.org/10.1108/ARJ-12-2014-0110