Usefulness Of Audit Report In Loan Decisions Granting

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We emphasize that it is interesting to study the opinion of the auditor as intermediary information between the company and its external users through an analysis of the type of the audit report (unqualified versus qualified audit opinion) in respect of Tunisian bankers in the case of making decisions to grant credits.

The results of our study are obtained and analysed from a distribution of a questionnaire sent to a sample composed of 76 loan officers in 20 Tunisian banks. We have found no significant results that the auditor's opinion is an information primarily taken for tunisian lender's judgements but it establishes an additional support for the evaluation of a file of credit. Where as, tunisian users, in general and loan officers in particular, perceived a qualified audit report as having a negative impact on the credibility of financial statements and the subsequent decision to grant credits.

Additional results chow that the audit report occupies the fourth place among the other sources of informations necessaries for the evaluation of the customer and has limited “information contents” to bankers in the present Tunisian auditing environment.

Keys words: auditor's opinion, lending decisions, file of credit.

JEL Classification: E51, E41, M42


This study will try to estimate the importance of the information of an audit report in a process of granting credits by tunisian bankers, in particular when the auditor's opinion is qualified at the end to appreciate better the needs of the users in charge of credit and to study the informative contents of this opinion.

The purpose of an audit report is to communicate the outcome of the auditor's review of the financial statements (Lin et al., 2003) allowing at first a better management and then a reconciliation of the divergent interests within the firm (Ng and Stoeckenuis, 1979). So, the audit report allows arranging a global vision of the company, to prevent risks and to incite to set up devices of appreciation, evaluation and control (Brousseau, 1993).

Within the framework of this debate which can exist within the company as well as between managers and shareholders as between managers and creditors (Jensen and Meckling, 1976), the firm has to give a particular care to the quality of the information (Antel, 1982) which it publishes: an objective that the auditor intervenes first for its realization.

Therefore, by formulating an opinion about the financial statements of the company, the auditor will guarantee the regularity and the sincerity of the information (Chan and Walter, 1996) of which he gives evidence that they appear according to the Generally Admitted Accounting Principles and the rules of the profession. Even, when an auditor provides an unqualified opinion on financial statements, users may view the file of credit of the customer as bad news and the decision of granting a credit will be difficult.

Thanks to the consideration of the informative asymmetries, banks are seen more capable than the other creditors to select and check the borrowers. This idea is supported by several researches and models wondering about the place of the audit report in the structure of debts of the company (Jacquillat and Levasseur, 1984). In addition, the two types of audit report (unqualified and qualified opinions), their effects have long been debated in the auditing literature (Bailey, Bylinski and Shields, 1983; Bamber and Stratton, 1997; Fargher and Wilkins, 1998; Frost, 1994; Lim, 1997) and they are differenced by the use of the “expect for” phrase to qualify an auditor's opinion.

We have tried to answer this problem by basing it self on the previous studies realized which treated the same question. We were inspired by experimental studies (Libby, 1979; Bamber and Stratton, 1997; Houghton, 1983; Jun Lin et al., 2003) and by reactions of the stock exchange (Dodd et al., 1984; Pucheta et al., 2004; Su and Zhao, 2000; Loudder et al., 1992; Baskin, 1972) made by several authors in order to show the utility of the audit report in the presence of the other sources of information that can use a creditor to examine the file of the customer. We study bank loan officers because this group of users routinely analyses financial data and has an inherent interest in the reliability of such data (Schneider and Church, 2008).

In Tunisia, the auditing function and the obligation to name an auditor is dated on 1959, the harmonization of the practices of audit report were began in 1982 during the creation of the order of tunisian chartered accountants (L'Ordre des Experts Comptables Tunisians) and especially of its reorganisation in 1988. Also, in Tunisia as in France, the obligation of the audit function and the presentation of the report of the statutory auditors were essentially established by laws. The law 82-61 of June 30th 1982 puts in charge of statutory auditors, the obligation to proceed to a detailed control of the accounts and to end expressly either the certification of the accounts, or the certification matched by reserve or the refusal of certification.

Our current study investigates bank loans officers' reactions to qualified audit reports and it is necessary to know the use of this information and its importance to make such decisions to grant credits. We have found that the auditor's opinion is secondary information taken by tunisian banks and it is considered as an additional support for the evaluation of a file of credit, where as when there's a doubt about the cleanness of financial statements, the decision can be difficult.

Our adopted methodological step is the distribution of a number of 76 questionnaires among 20 tunisian banks where we have obtained 44 questionnaires with answers as a rate of 58%. Our objective by this study is to update the knowledge of tunisian auditing standards and practices. Our findings will be important for many users such as investors, professionals, practionners, readers, etc.

The remainder of this paper is organized as follows. The next section reviews the relevant literature and provides a basis to develop the research hypothesis. Then, we describe the research method and present our results. At Last, we offer concluding remarks and study limitations.

Relevant literature

An auditing function conducted by independent professionals is considered as external mechanism of governance allowing to discipline managers (Jensen and Meckling, 1976) and to reduce the costs of agency. In this frame, the theory of agency analyses the appeal to the external audit as a mean to limit the possibilities of accounting manipulations, to settle conflicts and to reduce informative asymmetries between the principal and his agent.

Prior research has examined the demand of audit as a mean to move closer to the interests of parties that have contractual relations with a company (Jensen and Meckling, 1976). Also, Antel (1982) proves that the external audit is a mean to incentive managers to communicate correct informations to shareholders. Besides, Chow (1982) considers it as a mechanism of regulation between shareholders managers and lenders. In fact, Charreaux (1997) asserts that the appeal to the debts allows managers to escape in the discipline of shareholders but create another relation with bankers who protect themselves by the appeal to the contractual clauses or to the taking of guarantees.

Thus, the mission of an external auditor has triple purposes, he has to protect creditors and minimize the costs of agency to protect shareholders and to help the owner to master well the management of his company. In addition, during the relation of credit, the bank can be in relation of lack of information and the impossibility to know the efforts supplied by the company. In that case, the society appeals to the diversion of capital lent to more risks in order to maximize the value of investment. The reason that many empirical studies (Chow, 1982; Alice, 2005) were able to explain the demand of the audit by the importance of the costs of agency and the resolution of those conflicts within the firm.

Our objective concerns essentially the place of the audit report in the case of granting credits by banks. So, for a long time, numerous researches from whom we can quote Libby (1979), Firth (1978), Dodd et al., (1984), Elliot (1982) and Baskin (1972) tried to know the use really made by audit reports among the various elements of financial information. Besides, certain authors were interested to measure the utility of the audit report by simple inquiries with the various users through various sources of available information (Lee and Tweedie, 1975).

What we count exactly in this article is to know the reaction of the creditors in particular the bankers to financial statements presenting a qualified opinion. Such studies are said “reactions to the audit report” and take two different forms. Empirical studies led on financial markets and experimental studies concerning the behaviours of the main users.

As regards to researches concentrated on the importance of the audit report and its impact on the stock market, the measure of the reaction of users to the message received from the auditors is translated by the difference of the profitability expected from the share in absence of uncertainty qualification on the accounts of the company.

Several studies and researches were led on this stadium and in various environments in which certain authors tried to compare the influence of various formulations of audit reports on the stock exchange returns. Indeed, Firth (1978) made this study in Great Britain, Ball et al. (1979) on the Australian market, Dodd et al., (1984) on the American stock exchange. Soltani (1992) realized a similar research on the French market of listed companies in Paris between 1975 and 1990 by observing the consequences of all the type of uncertainty qualifications published by the auditors. More recently, Pucheta et al., (2004) focused their attentions on the Spanish market and Jun Lin et al., (2003) in china.

However, other researches have concentrated on a single category of the uncertainty qualification “subject to” we quote as example Elliot (1982) and Loudder et al., (1992) who added that the disclosure of a qualified opinion can generate an inverse reaction of the market. Baskin (1972) and Mittelstead et al., (1992) were interested in the analysis of the incidence of the American uncertainty qualifications connected in charge of methods or accounting principles.

furthermore, Baskin (1972) made his research on the New York stock exchange by listing the companies which underwent a change of accounting methods between 1966 and 1969 on a sample of 137 companies registered on the New York Stock Exchange NYSE at the end to examine the informative impact of this type of qualification in case of an efficient market. Also, Alderman (1977) made a research on the uncertainty qualification “subject to” at the end to measure the influence of this qualification on the assessment of the risk. The data collection was made on a sample of 20 firms having received such qualification between 1986 and 1971.

Besides, both authors Frishkoff and Rogowski (1978) underwent a study on both American stock exchanges “New York Stock Exchange” and “American stock exchange”, but they interested in another type of qualification “disclaimer of” and its impact on stock market prices. This study was led on 7500 firms going from July the 1st 1972 till June 30th 1974. Among, which 22 only who underwent the qualification “disclaimer of”. In another way, Fleak and Wilson (1994) were interested on the informative contents of only American uncertainty qualification connected to the qualification “going concern” on stock market prices for the period 1979-1986.

Contrary to this study, Fields and Wilkins (1991) led another research to examine the impact of “good news”, the publication of an unqualified audit report after several exercises containing qualifications and that was between 1978 and 1987 on a sample of 52 audit reports. So, the credibility of financial statements has an effect on the decisions of investment and on the notices of lenders, it has an impact on the shares of companies and on their costs. Besides, the newest studies which are made showed that a qualified audit report indicates a high risk and reflect a doubt concerning the financial contents which can influence the evaluation of users and lenders (Fargher and Wilkins, 1998; Melumad and Ziv, 1997; Seipel and Tunnel 2000; Sharma and Sidhu, 2001).

Even, certain studies suggest that the qualification of audit reports can be considered as an indicator of “unclean” accounts and may affect the determination and the use of financial statements (Blackwell et al, 1998; Hathely et al, 1991; Lim, 1997). Also, Firth (1978) shows that the qualification of the audit report offers an important informative content for the decision making of investment on the British financial markets. So, the reaction of the price is immediate in the publication of a qualified audit report and has no effect before the date of its publication. Banks and Kinney (1982) also argue that the abnormal profitability is bigger for the company which their audit reports contain qualifications.

Hence, Mutchler (1985) stipulates that the results of the statistic tests allow concluding that the opinion “going concern” has a negative impact on stock market prices. In the same context, Hopwood et al. (1989) prove that the broadcast of a qualified audit report with “going concern” is an important mean for the users of financial statements allowing them to foresee the bankruptcy of the concerned firms. Also, Fields and Wilkins (1991) revealed a positive adjustment of the prices to the announcement of the retreats of uncertainty qualifications because it represents information which influences the wealth of shareholders.

Finally, other researches like Ball et al., (1979), Mittelstead et al., (1992) and Pucheta et al., (2004) show no particular reaction of markets to the publication of audit reports with qualification.

In addition to these studies of the stock exchange reactions, other researches led on the behaviours of users in front of broadcast of audit reports. The empirical analyses and the synthesis of the results chow different reactions from credit officers in various environments such as the studies of Libby (1979), Bamber and Stratton (1997) and LaSalle and Anandarajan (1997) in United Status, the study of Abdel-khalik et al., (1986) in Canada and finally Houghton (1983) and Gul (1987) in Australia.

Indeed, according to Bamber and Stratton (1997) and Buchman and Collins (1998), a qualified audit report is considered as an indicator of unclean financial statements. In another term, the qualification of an audit report supplies the base of the auditor opinion that the users reached of an inherent risk. Gul (1987) ends from his empirical study that the qualification “subject to” increases the risk perceived by bankers who require certain guarantees before making a commitment. It is the reason for other authors, that the officers of credit indicate that this qualification can supply information useful for the decision-making.

Besides, other studies suggest that the audit report influences the judgments of lenders. Indeed, Bamber and Stratton (1997) find that the uncertainty in the audit report modified by SAS 58 (AICPA) influences the evaluation of creditors in their evaluation of risk subsidies, rate of interest and the decision of granting a credit. It is considered as a source of additional information and a second opinion about financial statements.

Firth (1987) manages to conclude that bankers and analysts of credit grant a big importance for the audit report that contains a qualification of “going concern” type and on the evaluation of assets. Also, LaSalle and Anandarajan (1997) prove that the uncertainty concerning disputes influences the decisions of bankers. Therefore, no bank agreed to grant a credit to the company that the audit report contains such qualification.

However, the majority of researches did not reach net conclusions, Libby (1979) and Abdel-khalik et al. (1986) find that a qualification of audit report cannot affect the decision of lenders. Houghton (1983) find a similar result by asserting that a qualification of an audit report is not considered as sufficient information to modify in a significant way the decision of bankers. For Johnson and Pany (1984), the fact that the auditors are associated with the publication of provisional accounts does not improve significantly the confidence granted to these accounts by bankers and these last ones do not consider the presence of an auditor as an element determining the decision of granting a credit.

Even, Jun Lin et al. (2003) show that the qualification of audit report has weak informative contents for the Chinese users and it is necessary to improve the principles and the standards practises of the profession. Also, Estes and Reimer (1977) their empirical results prove that the credit officers are not influenced by the opinion “expect for”. In fact, Bessel et al. (2003) argue that a qualification of auditor opinion des not increase in a significant way the risk perceived by neither financial analysts nor the financial decision-making.

Finally, Soltani (1996) suggests that there's a relative importance granted by bankers as well as by users to audit reports as reliable source of information, because these users consider that the audit report is insufficient for such a decision and declare to use the other sources of information such as personal judgements.

Study background and hypothesis

The audit report has to express clearly the opinion of the auditor on the results of the operations of the company presented in financial statements. This information proposed to express the opinion of the auditor, has to give an accurate and sincere image and has to make reference to accounting standards.

According to the Article 83 of the tunisian commercial law, the formulation of the opinion of the statutory auditor on the financial statements of the company can take the following three forms. The certification without reserve, the certification with reserve and the refusal to certify. An opinion without reserve (unqualified opinion) is expressed when the statutory auditor obtained a reasonable insurance of the respect of the Generally Admitted Accounting Principles and conditions of the profession. However, a qualified opinion is expressed when the auditor estimates that the Generally Admitted Accounting Principles are not respected and its wrong application has a significant impact on the presentation of the accounts. Finally, the refusal to certify is mentioned by the auditor when he notices uncertainties which affect the sincerity of accounts in a way that he cannot be able to form a satisfactory conviction on the regulatory of financial statements.

We remind that our objective consists in estimating the importance of the information contained in the report of the auditor in particular when it is qualified and its impact on the credibility of financial statements and afterward the decision to grant credits. The formulation of the hypotheses consists simply in translating in a clarify way the problem of our study. Two main hypotheses, which will be tested, have for objective the identification of the impact of the qualified audit report on the credibility of the company's financial statements. The first and the second hypothesis to be investigated in this study are specified as follows:

H1. The auditor's report is “basic information” taken firstly during an analysis of a file of credit.

By this first hypothesis, we want to know the place that may hold the audit report among the other sources of information taken by the tunisian bankers in a process of granting credits.

H2. A qualified audit report has a negative impact on bankers' assessments of the credibility of financial statements of the company.

This last hypothesis tries to analyze the impact of the qualification on the credibility of financial statements on one hand and on the decision of granting of credit on the other hand. More specifically, an unqualified auditor's opinion provides reasonable assurance of the cleanness of financial statements and assists users in making good rational economic decisions.

Methodology and data

For our empirical search, we have chosen to send a questionnaire to the various credit officers within the tunisian banks. It is about various members of committee of credit, about analysts of credit, etc. the choice of this methodology by questionnaire is turned out the best adapted to our study. Indeed, to contact these people in charge, a list of banks was established and personal contacts were realized. Our questionnaire was sent to 76 credit officers, belonging to 20 Tunisian banks. The choice of banks is justified by the importance of the information for their needs of evaluation of a customer applicant of credits and the variety of the audit reports, which they can meet.

Experiment instrument

The use of the questionnaire is justified by the fact that the majority of the previous studies approaching the problem on the utility of the audit report on the decisions of granting credits were made by having appeal to questionnaires. Our questionnaire was sent to 76 loan officers among 20 Tunisian banks, we have obtained only a rate of 58% from a number of 44 among the distributed questionnaires.

Libby (1979) used a questionnaire sent to 36 creditors belonging to four bigger banks of Chicago. The obtained results are made by using the analysis of the variance. In addition, LaSalle and Anandarajan (1997) elaborated four questionnaires, which were distributed in 2000 credit officers. Also, in the American context, the study led by Bamber and Stratton (1997) was made by mean of a questionnaire sent to 91 creditors. In the same context, Firth (1978) tried to show the impact of the various types of opinions on the decisions of the bankers also by resorting to a questionnaire. The study of Abdel-Khalik et al., (1986) was also realized by a questionnaire sent to 64 Canadian creditors.

Experiment participants

Participants in this study consisted of presidents of the committee of credit, members of the committee, directors and analysts of credit. Our questionnaire is structured as follows: a first list of questions relating to the status of the person that participated in this study, a second list of general questions concerns the decision-maker of a credit and finally the third list of questions relative to the company applicant of a loan at the end to chow the influence of the opinion of the auditor on the decisions of the bankers. The credit officers were directly contacted, it was compulsory to lead conversations with various creditors especially those who occupy the high place of the hierarchy to make sure of our objective, then to sensitive them of the interest of our research. The following table shows the status of participants.

The literature review shows that the methodology of the data collection is the same for several authors by the distribution of a questionnaire to the various people in charge of credit. However, the statistical tools were not the same and every author adopted the measure which is convenient for its research. To answer their research problem, Johnson and Pany (1994) appealed to the multi-varied analysis (MANOVA). As for Estes and Reimer (1977), they limited themselves to tests of independence of Chi-square. However, Firth (1978) is limited to a simple comparison of the distributions of frequency between the answers of the bankers receiving qualified reports and the others unqualified. Soltani (1996) used tests of independence of Chi-square to measure the correlation between the various answers in the same way, Bamber and Stratton (1997) as well as La Salle and Anandarajan (1997) they used the tests of independence of Chi-square and the calculating of frequency to estimate the reaction of the bankers to four types of an audit report.

As regards to our empirical analysis, distributions of frequency as well as tests of independence of Chi-square were employed to answer our objective.


The statistical description revealed frequencies and percentages to show the impact of every question on the behaviours of tunisian bankers then a test of independence of Chi-square is made to confirm our hypotheses quoted previously. Descriptive statistics regarding the participants 's responses and the test of chi-square made between different questions are presented in table 1 and 2 at the end to show the place of auditor 's opinions among the other sources of information that can need the banker during the evaluation of the financial situation of his customer.

The observation of the table n°1 showing the contribution of every source of information in the assessment of a file of credit, indicates that the opinion of the auditor occupies the fourth place among the other sources of information with a rate of 86, 4 %. However, it turns out that it exists other sources of information most important and occupy the priority for bankers. Indeed, the totality of participants considers that the information supplied by the financial statements as being the first information taken and has a rate of 100%. Secondly comes the information supplied by the central bank of Tunisia with term of management of risk (95, 5%) because it facilitates to creditors the apprehension of the customer to avoid the risk of insolvency. In the third place comes the relation that can exist between the bank and the firm followed by the opinion of the auditor on financial statements.

Then the test of Chi-square applied shows an independence between the place which occupies the audit report among the other sources of information and the importance of this audit report for the eyes of the bankers, so as represented in the following tables, the interaction effect is not statistically significant (?²= 1,312; p= 0,252>0,05). It comes to confirm the results obtained previously which stipulate that the opinion of the auditor is an important source of information for the bankers but occupy the fourth place among the other sources of information. Thus, our first hypothesis is not confirmed and the audit report is considered an additional support for a file of credit and not taken firstly into account.

Besides, to test the validity of the second hypothesis and to see if a qualified audit report influences negatively the decision of the tunisian bankers in granting of credit, we have appeal to several crossings between various variables. The crossing that we have made is attributed to the question n°3 represented by the variable V10 with each of the following questions: Q4, Q5, Q6, Q7, Q8 and Q9 represented by variables respectively: V11, V12, V13, V14 and V15. The questions concerned by the second test of chi-square are presented bellow:

We have appeal to all these variables to estimate the influence of the qualification with all its forms on the behaviours of the bankers to grant credits. The test of Chi-square so applied reveals significance interactions between variables. In addition, the crossing between the questions shows that in most of the cases, variables are dependent the some with regard to the others (p value < 0, 05). It means that the bankers attach a big importance for the publication of the qualification and they can modify their decisions to grant a credit if this qualification is of a significant gravity that influences negatively the credibility of financial statements of the company subject of the demand. Thus, our second hypothesis is confirmed.


To conclude, we say that the opinion of the auditor didn't take an important place for the decision of granting of credit and convey an additional informative content for the tunisian banks. However, a qualified audit report has a negative impact on the decision of the tunisian bankers but it does not contradict that the evaluation of a file of credit bases itself on other sources of more interesting information for tunisian bankers such as financial statements, the information emitted by the central bank of Tunisia and the relation bank- company.

In spite of the help that we had from tunisian bankers and their collaboration to answer our questionnaire, some critics can be mentioned. The first origin of these critics returns to the place occupied by the opinion of the auditor among the other sources of information that the banker uses in his decision-making. It seems that in the reality another procedure can be led.

Therefore, and by fear that we are going to have no answers to our questionnaire, we limited our study through only a questionnaire without having appeal to financial statements or consultation of certain reports, where even a case study of a company as an example. It is the reason that the information seems to be insufficient to analyze a demand of a loan and the results of the study can be limited, but the questionnaire is the only means adopted by the previous studies, we wanted to resort to the same.

Also, it is necessary to indicate that most of the answers being subjective and the loan officer answers the questions of a way that he thinks suitable and not according to the procedure made really.

Furthermore, let us note that our study is limited to the examination of the effect of the opinion of the auditor on a single category of users (banks) so, the obtained results cannot be generalized to the other users. But such a research is useful because it tempts at the suggestion of future ways of development for example, the extension of our sample, indeed, we can duplicate our study on the companies of Leasing; we can also develop the empirical results. Consequently, the last ones may be confronted by studies from the examined files and having been the object of real decisions. Finally, In front of weak interest carried by the Tunisian banks in the audit report, it is interesting to determine the foundations of this indifference.


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