Effects of Audit Materiality Disclosures: Evidence from Credit Lending Decision Adjustments
Betriebswirtschaftliche Forschung und Praxis (BFuP), 2018, Vol. 70, Issue 4, pp. 440-471
44 Pages Posted: 30 Jun 2014 Last revised: 30 Oct 2018
Date Written: February 14, 2018
Abstract
This study examines credit lending decision adjustments of executive board members of German banks following different levels of auditor materiality threshold disclosures. Based on an experimental research design, we find that if a materiality threshold, which is in line with current audit standards and audit firm guidelines, is disclosed, credit lenders do not adjust a preliminary credit lending decision. However, if the disclosed audit materiality threshold increases, we are able to document adjustments to prior credit lending decisions. Furthermore, we show that the qualitative materiality factor investigated negatively affects prior credit lending decisions. The findings from this study contribute to the current debate about the audit reporting model. Our results suggest that disclosing audit materiality is beneficial to informed financial statements users because it offers the opportunity to make credit lending decisions that are in line with the materiality threshold applied by the auditor. Therefore, disclosing auditor’s materiality as a signal about the potential noise and bias in the audited financial statements contributes to efficient contracting.
Keywords: auditor reporting, credit lending decisions, materiality
JEL Classification: M40, M41, M42
Suggested Citation: Suggested Citation