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A test of the auditor reliability framework using lenders’ judgments

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  • DeZoort, F. Todd
  • Holt, Travis
  • Taylor, Mark H.

Abstract

Taylor et al. (2003) challenged the longstanding notion that independence is the capstone of the audit profession by proposing a conceptual framework that emphasizes reliability, rather than independence, as the professional endgame for auditors. Although the reliability framework has attracted attention from policymakers, it has not been tested empirically in an audit context to assess its validity from a user’s perspective. The objective of this study is to test the auditor reliability framework and its formative ethical constructs (i.e., integrity, expertise, independence, objectivity, and reliability) with a sample of 168 commercial lenders. We also extend the reliability framework to examine the extent that perceived auditor reliability affects lenders’ judgments of financial reporting reliability and default risk in a hypothetical lending scenario. Finally, we evaluate the extent that lenders’ judgments are affected by auditor provision of nonaudit bookkeeping and payroll services to a prospective borrower in violation of current independence rules. The results provide strong empirical support for the relations predicted in the reliability framework. Structural equation model results indicate that auditor integrity is the foundation of the framework, directly affecting lenders’ assessments of auditor expertise, independence, objectivity, and reliability. Further, although integrity and objectivity directly affect perceived auditor reliability, independence and expertise only affects reliability indirectly through its impact on objectivity. Finally, we find that lenders perceive no decrease in auditor objectivity or reliability when existing independence rules are violated by combining audit services with nonaudit services for prospective borrowers.

Suggested Citation

  • DeZoort, F. Todd & Holt, Travis & Taylor, Mark H., 2012. "A test of the auditor reliability framework using lenders’ judgments," Accounting, Organizations and Society, Elsevier, vol. 37(8), pages 519-533.
    • Handle: RePEc:eee:aosoci:v:37:y:2012:i:8:p:519-533
    DOI: 10.1016/j.aos.2012.08.003
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    1. Christ, Margaret H. & Masli, Adi & Sharp, Nathan Y. & Wood, David A., 2015. "Rotational internal audit programs and financial reporting quality: Do compensating controls help?," Accounting, Organizations and Society, Elsevier, vol. 44(C), pages 37-59.
    2. 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.
    3. Andres Guiral & Doocheol Moon & Javier Perez‐Garcia & Jungyoon Byun, 2021. "Do affective reactions to sustainability performance unintendedly influence lending decisions?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(6), pages 1635-1646, November.
    4. Schneider, Arnold, 2018. "Studies on the impact of accounting information and assurance on commercial lending judgments," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 63-74.
    5. Pantic, B., 2016. "Comparability of financial reports: A literature review of most recent studies," Working Papers 6451, Graduate School of Management, St. Petersburg State University.
    6. Arnold Schneider, 2018. "Financial expertise on audit committees of loan applicants: a research note to test the effects on lending decisions," Accounting and Business Research, Taylor & Francis Journals, vol. 48(2), pages 225-235, February.
    7. Marie Caussimont & David Carassus, 2015. "L’audit financier en contexte territorial : vers un audit de performance de la gestion locale ?," Post-Print hal-02141946, HAL.

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