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Does knowledge about a borrowing firm’s internal audit influence bank lending decisions?

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  • Arnold Schneider

    (Georgia Institute of Technology)

Abstract

This study examines whether knowledge about a borrower’s internal audit function affects commercial lending decisions. An experiment was conducted with 61 lending officers, who provided risk assessments and lending probabilities for a hypothetical line of credit applicant. The independent variable, the company’s internal audit function, was manipulated using three levels—no internal auditing, weak internal auditing, and strong internal auditing. Results show that lenders’ risk assessments are not influenced by a borrower’s internal audit function, but the likelihood of approving a line of credit is positively impacted. More specifically, for a borrower whose financial statements are compiled by a regional CPA firm, the existence of an internal audit function enhances the probability of line of credit approvals, although the strength of the internal audit function does not appear to have an impact. An implication for companies that want to enhance their borrowing prospects is that it may be worthwhile to invest in some form of internal auditing, but they do not have to be very concerned about its strength for purposes of obtaining lines of credit from banks.

Suggested Citation

  • Arnold Schneider, 2021. "Does knowledge about a borrowing firm’s internal audit influence bank lending decisions?," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 18(3), pages 304-314, September.
    • Handle: RePEc:pal:ijodag:v:18:y:2021:i:3:d:10.1057_s41310-021-00122-4
    DOI: 10.1057/s41310-021-00122-4
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    References listed on IDEAS

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