A Cascading Effect: How Do Audit Rotation Rules Affect Loan Officers’ Perceptions and Decisions for Nonpublic Companies?

Abstract

This study examines whether the existence and type of audit rotation (no rotation, partner or firm) influences loan officers’ perceptions of auditor independence, financial statement reliability and decisions of extending a loan involving nonpublic companies. In an experiment utilizing 122 loan officers, I find that loan officers are more confident the audited financial statements are free from intentional misstatement (omissions) when there is Partner or Firm Rotation compared to No Rotation. Additionally, I find that loan officers are more likely to approve a loan when there is Partner Rotation compared to No Rotation or Firm Rotation.