The influence of bank’s knowledge about of the borrowing company internal audit Function on lending decisions

Document Type : Original Article

Authors

1 Assistant professor of , Management and Accounting ,Shahid Beheshti University, Tehran, Iran

2 Assistant Professor, Department of Accounting, Faculty of Social Sciences and Economics, Alzahra University, Tehran, Iran

3 Senior Expert, Department of Accounting, Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran.

Abstract

Theoretically, it is expected that the existence of a powerful Internal Audit Function(IAF) will strengthen internal controls and, as a result, increase the reliability of financial reporting. Hence, it is expected that banks and credit institutions will be encouraged to lend when the company has a powerful IAF. For this reason, lending decisions can be influenced by the existence and strength (quality) of the borrower's IAF. In this regard, the purpose of this study is to investigate the influence of bank’s knowledge about of the borrowing company IAF on lending decisions. For this purpose, all branches of banks listed in Tehran stock Exchange & Iran Fara Bourse in Tehran were studied in 2023. A questionnaire was used to collect research data. After distributing the questionnaire, finally 145 responses were collected. The Mann-Whitney test (U test) was used to analyze the data. The findings of the research showed that the presence of the IAF has a positive and significant influence on lending decisions. A more detailed analysis showed that the age of the IAF, having an approved internal audit plan, reporting to the audit committee and the board of directors versus to the executive, the use of audit software, training courses held for internal audit staff, auditors' professional certificates, the average experience the IAF’s auditors has a positive and significant influence on lending decisions. The findings did not show a significant relationship between the number of reports issued by the IAF and the number of IAF’s auditors and lending decisions.

Keywords

References

Barazandeh, Maryam (2018), the quality of internal audit performance and profit management, master's thesis of Alzahra University's Faculty of Management and Accounting. [in Persian]
Securities and Exchange Organization, internal control guidelines for issuers admitted to the Tehran Stock Exchange and Iran Foreign Exchange, approved on 2012/05/05 by the organization's board of directors.[in Persian]
Mennati, Vahid, Barzegari, Omid. (2022). The effect of internal audit performance on reducing perceived risk. Journal of Financial Accounting Research, 14(4), 1-28. [in Persian]
Mennati, Vahid, Zaman, Elahe.(2019), Factors affecting the effectiveness of internal audit, Experimental Accounting Research, Volume 9, Number 4(34), 247-270. [in Persian]
Nikbakht, Mohammad Reza, Rezaei, Zabihollah, Mennati, Vahid (2017) Development of Internal Audit Quality Model, Audit Knowledge, Volume 17, Number 69, 57-5. [in Persian]
Association of Certified Fraud Examiners (ACFE), Occupational Fraud (2022):a Report to the Nations, available at: https://legacy.acfe.com/report-to-thenations/2022/.
Baiman, S. and M.V. Rajan. 2002. Incentive issues in inter-firm relationships. Accounting, Organizations, and Society 27(3): 213–238.
Baker, W.M. and G.M. Cunningham. 1993. Effects of small business accounting bases and accountant service levels on loan officer decisions. Journal of Business Finance & Accounting 20(4): 465–477.
Bandyopadhyay, S.P. and J.R. Francis. 1995. The economic effect of differing levels of auditor assurance on bankers’ lending decisions. Canadian Journal of Administrative Sciences 12(3): 238.
Barazandeh, M. (2011). Internal audit quality and earnings management, Master thesis, Faculty of Social Sciences and Economics, Alzahra University, Tehran, Iran. [in Persian].
Berry, A.J., J.R. Ross, D. Citron, and R. Jarvis. 1984. An investigation of the use of accounting information by US Bankers in the UK. British Accounting Review 16(1): 27–55.
Blackwell, D.W., T.R. Noland, and D.B. Winters. 1998. Journal of Accounting Research 36(1): 57–70.
Carcello, J. V., Eulerich, M., Masli, A., & Wood, D. A. (2020). Are internal audits associated with reductions in perceived risk?. Auditing: A Journal of Practice & Theory, 39(3),55-73.
Carcello, J.V., M. Eulerich, A. Masli, and D.A. Wood. 2020. Are internal audits associated with reductions in perceived risk? Auditing: A Journal of Practice & Theory 39(3): 55–73.
Chalmers, K.,  Hay, D. and  Khlif, H. (2018). Internal control in accounting research: A review, Journal of Accounting Literature, Volume 42, June 2019, Pages 80-103
Chin, C.L., W.R. Yao, and P.Y. Liu. 2014. Industry audit experts and ownership structure in the syndicated loan market: At the firm and partner levels. Accounting Horizons 28(4): 749–768.
Chiu, Irish H-Y, 2015, Regulating (From) the Inside The Legal Framework for Internal Control in Banks and Financial Instututions, HART PUBLISHING, OXFORD AND PORTLAND, OREGON.
Committee of Sponsoring Organizations of the Treadway Commission (COSO).2013. Internal Control — Integrat​​​​​​​​ed F​r​​amework.
Committee of Sponsoring Organizations of the Treadway Commission (COSO).1992. Internal Control — Integrat​​​​​​​​ed F​r​​amework.
Cote, J., and C.K. Latham. 2006. Trust and commitment: Intangible drivers of interorganizational performance. Advances in Management Accounting 15: 301–333.
DeZoort, F.T., T. Holt, and M.H. Taylor. 2012. A test of the auditor reliability framework using lenders’ judgments. Accounting, Organizations and Society 37(8): 519–533.
Firth, M. 1980. A note on the impact of audit qualifications on lending and credit decisions. Journal of Banking and Finance 4(3): 258–267.
Francis, B., I. Hasan, M. Koetter, and Q. Wu. 2012. Corporate boards and bank loan contracting. Journal of Financial Research 35(4): 521–552.
Gramling, A.A., M.J. Maletta, A. Schneider, and B.K. Church. 2004. The role of the internal audit function in corporate governance: A synthesis of the extant internal auditing literature and directions for future research. Journal of Accounting Literature 23: 194–244.
Guiral, A., E. Ruiz, and H.J. Choi. 2014. Audit report information content and the provision of non-audit services: Evidence from Spanish lending decisions. Journal of International Accounting, Auditing and Taxation 23: 44–57.
Gul, F.A. 1991. Size of audit fees and perceptions of auditors’ ability to resist management pressure in audit conflict situations. Abacus 27(2): 162–172.
 Institute of Internal Auditor (2016), The IIA Research Foundation, International Standards for the Professional Practice of Internal Auditor.
Institute of Internal Auditors (2013) THE IIA'S THREE LINES MODEL.
Institute of Internal Auditors (2017) GLOBAL PERSPECTIVES AND INSIGHTS Internal Audit and External Audit Distinctive Roles in Organizational Governanc, Issue 8.
Institute of Internal Auditors (2017). International Professional Practices Framework, Supplemental Guidance, Model Internal Audit Activity Charter.
Institute of Internal Auditors (IIA). 2009. International Standards for the Professional Practice of Internal Auditing. Altamonte Springs, FL: IIA.
Institute of Internal Auditors (IIA). 2010. IPPF Practice Guide: Measuring Internal Audit Effectiveness and Efficiency. Altamonte Springs, FL: IIA.
Jabbarzadeh Kangarlouei, S. Motavassel, M. and Mohammadzadeh, V. (2013) Evaluation of internal audit effectiveness in Tehran Stock Exchange (TSE), International Journal of Advances in Management and Economics.
James, K.L. 2003. The effects of internal audit structure on perceived financial statement fraud prevention. Accounting Horizons 17(4): 315–327.
Kim, J.B., and B.Y. Song. 2011. Auditor quality and loan syndicate structure. Auditing: A Journal of Practice & Theory 30(4): 71–99.
Kim, J.B., B.Y. Song, and J.S. Tsui. 2013. Auditor size, tenure, and bank loan pricing. Review of Quantitative Finance and Accounting 40(1): 75–99.
Lin, S., M. Pizzini, M. Vargus, and I. Bardhan. 2011. The Role of the Internal Audit Function in the Disclosure of Material Weaknesses. The Accounting Review 86 (1):287-323.
Lowe, D.J., and K. Pany. 1995. CPA performance of consulting engagements with audit clients: Effects on financial statement users’ perceptions and decisions. Auditing: A Journal of Practice & Theory 14(2): 35–53.
Lowe, D.J., M.A. Geiger, and K. Pany. 1999. The effects of internal audit outsourcing on perceived external auditor independence. Auditing: A Journal of Practice & Theory 18(s-1): 41–44.
McKinley, S., K. Pany, and P.M. Reckers. 1985. An examination of the influence of CPA firm type, size, and MAS provision on loan officer decisions and perceptions. Journal of Accounting Research 23(2): 887–896.
Mennati, V., & Barzegari, O. (2023). The Effect of Internal Audit Performance on Reducing Perceived Risk. Financial Accounting Research, 14(4), 1-28. doi: 10.22108/far.2023.136209.1945. [in Persian].
Mennati, V., & Zaman, E. (2020). Internal Audit Effectiveness. Empirical Research in Accounting, 9(4), 247-270. doi: 10.22051/jera.2018.19821.1998 . [in Persian].
Miller, J.R., and L.M. Smith. 2002. The effects of the level of assurance, accounting firm, capital structure, and bank size on bank lending decisions. Journal of Accounting, Auditing & Finance 17(1): 51–71.
Nikbakht, M. R. Rezaee, Z. and Mennati,V. (2017). Designing Internal Audit Quality Model, Journal of Audit Science: 17 (69). [In Persian].
Prawitt, D. F., Sharp, N. Y. and Wood, D. A. (2012) Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes-Oxley Get It Wrong? Contemporary Accounting Research 29 (4):1109-1136.
Prawitt, D. F., Smith, J. L. and Wood, D. A. (2009) Internal Audit Quality and Earnings Management. The Accounting Review 84 (4):1255-1280.
Rajan, R.G., and A. Winton. 1995. Covenants and collateral as incentives to moniter. Journal of Finance 50: 1113–1146.
Schneider, A. 2010. Do client dependence and amount of audit fees affect lending decisions? Managerial Auditing Journal 25(5): 444–457.
Schneider, A. 2013. Internal auditing and real earnings management. Journal of Contemporary Issues in Business Research 2(4): 97–108.
Schneider, A. 2017. Is commercial lending affected by knowledge of auditor switches from Big 4 firms to regional firms? Accounting Research Journal 30(2): 153–170.
Schneider, A. 2019. Internal audit sourcing: Does it matter to commercial lenders? Australian Academy of Accounting and Finance Review 5(1): 41–47.
Schneider, A., and B.K. Church. 2008. The effect of auditors’ internal control opinions on loan decisions. Journal of Accounting and Public Policy 27(1): 1–18.
Schneider, A., and R.J. Ramsay. 2000. Assessing the value added by peer and quality reviews of CPA firms. Research in Accounting Regulation 14: 23–38.
Securities and Exchange Organization of Iran (2012) Internal control rule . [in Persian].
Taylor, P. 2013. What do we know about the role of financial reporting in debt contracting and debt covenants? Accounting and Business Research 43(4): 386–417.
 The United States Congress(2002) Sarbanes-Oxley Act of 2002
Trpeska, M., A. Atanasovski, and Z.B. Lazarevska. 2017. The relevance of financial information and contents of the new audit report for lending decisions of commercial banks. Accounting and Management Information Systems 16(4): 455–471.
Zhang, Y., F. Sun, and C. Xian. 2017. Does auditor industry expertise affect bank loan costs? Managerial Auditing Journal 32(3): 295–324.
Scientific journal of motaher auditing studies
Volume 2, Issue 1 - Serial Number 3
Spring Quarterly
April 2024
Pages 11-31

Files

Share

How to cite

Statistics