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Int. J. Accounting, Auditing and Performance Evaluation, Vol. 5, No. 3, 2009
Audit expectation gap and loan decision performance of bank officers in Iran Amirhossein Taebi Noghondari and Soon Yau Foong* Graduate School of Management, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor, Malaysia E-mail:
[email protected] E-mail:
[email protected] *Corresponding author Abstract: This study examines the effect of accounting knowledge and experiences of Iranian bank officers on the audit expectation gap, and investigates whether the gap mediates (or explains) the individual factorloan decision performance relationship. Copies of a structured questionnaire were distributed to 113 loan officers from five large commercial banks in Iran and responses of 111 bank officers were analysed. The results show the existence of a fairly large audit expectation gap among the Iranian bank loan officers, and accounting knowledge was found to significantly mitigate the extent of the gap. More importantly, this study found a highly significant negative relationship between the audit expectation gap and loan decision performance of the Iranian bank officers. Further analyses indicate that the audit expectation gap fully mediates the individual knowledgeperformance relationship. The findings of this study have important policy implications for recruitment and training of the bank officers. Keywords: accounting; audit expectation gap; experience; Iranian bank officers; knowledge; loan decision; performance evaluation. Reference to this paper should be made as follows: Noghondari, A.T. and Foong, S.Y. (2009) ‘Audit expectation gap and loan decision performance of bank officers in Iran’, Int. J. Accounting, Auditing and Performance Evaluation, Vol. 5, No. 3, pp.310–328. Biographical notes: Amirhossein Taebi Noghondari is currently a PhD student at the Graduate School of Management, Universiti Putra Malaysia. He completed his MSc in Accounting at the same institution. He had worked for four years as an Accountant in several companies in Iran after obtaining his Bachelor of Accounting from the Islamic Azad University in Kerman, Iran. Soon Yau Foong, PhD, is currently an Accounting Professor at the Graduate School of Management, Universiti Putra Malaysia. She is a professionally qualified accountant from the UK and has published research papers in a number of international and national refereed academic journals, as well as in the proceedings of national and international conferences. Her research interests include intellectual capital measurement and reporting, knowledge management, and auditing and corporate governance.
Copyright © 2009 Inderscience Enterprises Ltd.
Audit expectation gap and loan decision performance of Iran bank officers 311
1
Introduction
One of the observed phenomena in the current highly competitive business environment is the growing complexity of business models and their operations. Consequently, external users of corporate financial statements are increasingly relying on external auditors to assure them that the financial information disclosed in corporate financial statements is reliable. Numerous studies carried out in both developed and developing countries (Guy and Sullivan, 1988; Jennings, Reckers and Kneer, 1991; Chandler, Edwards and Anderson, 1993; Humphrey, Moizer and Turley, 1993; Epstein and Geiger, 1994; McInnes, 1994; Kinney and Nelson, 1996; Gay, Schelluch and Reid, 1997; Best, Buckby and Tan, 2001; Frank, Lowe and Smith, 2001; Almer and Brody, 2002; Dewing and Russell, 2002; Fadzly and Ahmed, 2004; Lin and Chen, 2004; Boyle and Canning, 2005; Chowdhury, Innes and Kouhy, 2005; Dixon, Woodhead and Sohliman, 2006; Haniffa and Hudaib, 2007; Sidani, 2007; Zhang, 2007; Humphrey, 2008) have consistently indicated that users of audited financial statements have a higher expectation of the external audit function than what the audit profession perceives to be its responsibility. Users of financial statements typically expect the external auditors to detect and report frauds or to provide absolute assurance that the financial statements are free from errors and omissions. The profession, on the other hand, takes the viewpoint that the primary role of the audit function is not to detect fraud but to ensure that the financial statements are in compliance with the requirements of the relevant statutory regulations and professional standards. Hence, an audit expectation gap emerges. Despite having substantial evidence of the audit expectation gap, little or no studies have empirically investigated how personal knowledge and experience-related attributes may affect the expectation gap and whether the existence of the gap could adversely affect decision performance. The extent to which financial information is relied upon for decision-making is often a function of one’s perception of the credibility of that information. Since personal knowledge and experience-related attributes influence one’s perception of the reliability of audited financial information and the subsequent reliance on that information for decision-making, the linkage between the individual knowledge/ experience and his/her decision performance may, therefore, be attributed to the accuracy of his/her assessment of the reliability of audited financial information for decision-making. Bank loan officers frequently rely on loan applicants’ audited financial statements in assessing the credit worthiness of their loan applicants. An issue of concern is whether the personal knowledge and experience-related attributes of a bank loan officer would affect his/her perception of the role of the external audit function and also, whether the ‘correctness’ of that perception would affect the quality of his/her loan assessment decision. Misperception or over-expectation of the reliability of audited financial information may lead to undue reliance on that information for decision-making and that, in turn, could adversely affect the decision quality. Poor loan assessments often lead to non-performing loans and inefficient allocations of economic resources for investment purposes. An increasing level of non-performing loans in a nation impedes its economic development, and the effect is more serious in the less developed and developing countries. Before the Iranian revolution in 1979, Iran did not have its own accounting and auditing standards, and financial reporting in Iran then was very much influenced by the
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Anglo-American practices. The financial reporting disclosure requirements of the Iranian companies were based on the Iranian statutes for taxation and those for corporations, as well as those set by the Iranian Stock Exchange. The external audit function in Iran was generally monopolised by the Big Eight audit firms. The Iranian Audit Organization, which was established in 1987, is currently solely responsible for the auditing of all Iranian public-sector organisations and it is also the regulatory body for issuing Iranian accounting and auditing standards. The Research Centre for the Auditing and Accounting Profession (RCAAP) in the Iranian Audit Organisation plays a leading role in shaping the regulatory environment for the audit profession in Iran. The RCAAP is responsible for the translation and publication of selected International Accounting Standards (IASs) and International Standards on Auditing (ISAs) for subsequent adoption in Iran. Since 1997, the Iranian Audit Organisation had issued several Iranian Accounting Standards based IASs and Iranian Standards on Auditing based on ISAs. The first Iranian independent professional accounting body, the Iranian Association of Certified Public Accountants (IACPA), was formed in 2001 (Mirshekary and Saudagaran, 2005). Like most developing countries, the Iranian government is seriously encouraging private capital investments to hasten Iran’s economic growth. Since the economic growth of a nation is highly dependent on the existence of an active and efficient capital market, the audit expectation gap, which could lead to inefficient resource allocations in the nation’s financial and capital markets, may seriously impede the nation’s economic growth. In view of the dearth of empirical evidence of the relationship between the personal knowledge and experience-related variables and the audit expectation gap and also, whether existence of the gap would decrease decision performance, this study examines how individual knowledge and experience-related attributes of bank loan officers are related to the audit expectation gap and whether the gap mediates (or explains) the individual factorloan decision performance relationship of bank officers in a developing country, Iran.
2
Literature review
2.1 Audit function and loan decision-making The American Accounting Association (AAA, 1993) defines auditing as follows: “A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users”.
Based on the above definition and the auditor’s report regarding the ‘true and fair view’ of the corporate financial statements, users of audited financial statements often misinterpret or incorrectly assume that the auditor has fully attested to the accuracy of information disclosed in the financial statements. This is highlighted by Epstein and Geiger (1994) who opine that the public often expect the external audit function to detect all frauds and illegal acts, and to guarantee integrity of the financial statement information. Financial statements are frequently used by bank loan officers to determine terms and conditions for loans (Bamber and Stratton, 1997; Blackwell, Noland and Winters, 1998). In view of that, existence of the audit expectation gap may affect quality of such loan
Audit expectation gap and loan decision performance of Iran bank officers 313 assessment decisions. Based on the human information processing theory, Libby (1979) established a framework, as shown in Figure 1, to explain how audit report may impact decision-making. According to Libby, the impact of audit report on user decision-making is effected via three links: link 1 the user’s perceived accuracy of the auditor’s intended message; link 2 the impact of the perceived message on the user’s decision; link 3 the resulting impact on decision outcome. An auditor expresses his/her opinion on the “true and fair view” of the financial statements in the audit report. Users of the audited financial statements such as the loan officers would interpret the message in the audit report based on their perception of the role of the external audit function and accordingly, would decide on the extent to which such audited financial information could be relied upon for decision-making. If the auditor and the users have different perceptions of the role of the audit function, the message expressed in the auditor’s report would be misinterpreted (Peat, Marwick, Mitchell & Co., 1976, as cited by Libby, 1979). Any undue reliance on the financial statement information for decision-making due to over-expectation of the role of the audit function could lead the user to make a decision completely opposite to that made if the intended auditor’s message had been correctly understood. Therefore, Libby (1979, pp.100) concluded that “while we cannot be certain that a misperception (a breakdown in link 1) will lead to decreased decision performance of the user, an examination of the existence of such misperceptions would help establish whether it might be useful to test their effects on decisions. If no such misperceptions exist, then this potential problem is eliminated, as is the usefulness of the more arduous task of measuring their effect on decision quality.”
In view of the substantial empirical evidence of existence of the audit expectation gap, there is a strong justification for this study to empirically verify how over-expectation of the audit function could affect decision performance in a loan assessment task setting. Figure 1
Source:
Impact of auditor’s report on decision-making
Libby (1979, p.100).
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2.2 Audit expectation gap Studies on the audit expectation gap began a few decades ago, but it is because of the increasing number of corporate failures and financial scandals during the last two decades that the issue concerning the audit expectation gap has become a topic for serious debate among the accounting professionals, the regulators and the general public (Dewing and Russell, 2002). Researchers and professional bodies have provided several definitions of the audit expectation gap. The American Institute of Certified Public Accountants (AICPA, 1992) defines the audit expectation gap as “the difference between what the public and financial statement users believe auditors are responsible for and what auditors themselves believe their responsibilities are”. Porter (1993) defines the audit expectation gap as the gap between society’s expectation of auditors’ performance and auditors’ actual performance. Porter divides the gap into the reasonableness gap and the performance gap. The reasonableness gap is the consequence of the difference between what the society expects auditors to perform and what auditors can reasonably be expected to carry out in accordance to the relevant statutes or professional standards. The performance gap is the difference between what the society can reasonably expect auditors to accomplish and what auditors are perceived to have achieved. Most prior studies on the audit expectation gap focus on finding evidence of its existence by comparing perceptions of auditors and those of a range of users, such as investors, business managers, investment analysts, bank officers, creditors, government officers and educators (see Lin and Chen, 2004; Haniffa and Hudaib, 2007). Differences in perceptions between the auditors and users are reported in both the developed and developing countries, such as in the US (Schelluch, 1996), the UK (Humphrey, Moizer and Turley, 1993), Republic of South Africa (McInnes, 1994), Australia (Gay, Schelluch and Reid, 1997), Singapore (Best, Buckby and Tan, 2001), Malaysia (Fadzly and Ahmed, 2004), China (Lin and Chen, 2004), Bardados (Alleyne and Howard, 2005), Egypt (Dixon, Woodhead and Sohliman, 2006), Saudi Arabia (Haniffa and Hudaib, 2007), Bahrain (Joshi et al., 2007) and Lebanon (Sidani, 2007). Some studies focus specifically on the “reasonableness” component of the expectation gap by comparing the user’s perception of auditor’s responsibility to that as prescribed in professional auditing standards or statues. For example, Epstein and Geiger (1994) showed that the level of the audit assurance expected by investors in the New York Stock Exchange was clearly opposite to that stated in the auditor’s report and the professional standards, such as SAS No. 53. Haniffa and Hudaib (2007) reported that the institutional and cultural factors in Saudi Arabia affected the component of the expectation gap that dealt with the auditor’s prescribed responsibilities in its regulatory framework. The overwhelming evidence of the audit expectation gap has led to studies on the causes for the gap and how the gap may be narrowed. Humphrey, Moizer and Turley (1992) cited six potential causes for the audit expectation gap: (1) the inherent probabilistic nature of auditing, (2) the lack of awareness, naivety and unreasonable expectations of non-auditors, (3) the perceived evaluation of audit performance, (4) the increasing growth of auditors’ responsibilities, (5) corporate crises and (6) a selfinterested profession. Other researchers (Hopwood, 1990; Humphrey, 1991; Humphrey, Moizer and Turley, 1992; Sikka et al., 1992; Koh and Woo, 1998) attribute the expectation gap to the result of contradictions, motivated by self-interest of a selfregulated audit profession with minimum government intervention. Numerous studies,
Audit expectation gap and loan decision performance of Iran bank officers 315 such as Monroe and Woodliff (1993, 1994) and Al-Thuneibat, Khamees and Al-Fayoumi (2008), focus on remedial actions and most studies recommended educating the users to reduce the reasonableness element of the gap. However, Boyle and Canning (2005) opine that “education appears to be serving conflicting roles, on one hand reducing user misunderstanding regarding the audit function while on the other feeding perceptions of deficient auditor performance (pp.32)”. Unlike the earlier studies, Boyle and Canning (2005) examined the impact of audit education on the performance element of the gap and found that education, which enhanced understanding of the audit process, had affected respondents’ perceptions of how well auditors’ duties were performed, and as a consequence, respondents with the greatest exposure to audit education were most skeptical of the duties performed by the auditors. Tightening of the standards has also been argued by some researchers as a way to reduce the deficient standards gap (Gay, Schelluch and Baines, 1998; Almer and Brody, 2002; Zhang, 2007). In certain cultural setting, Islamic principles in auditing standards and the code of ethics could help to narrow the gap (Haniffa and Hudaib, 2007).
2.3 Individual factors and audit expectation gap Knowledge and experience are individual factors that could significantly influence one’s perception, judgment and attitude. Knowledge is a mixture of information, ideas, procedures and perceptions that mould a person’s attitude and decision-making (Bolisani and Scarso, 1999). According to Collan and Lianem (2005), decision-making process involves two phases: first, to understand the underlying decision domain (the theory) and second, to identify and apply the decisional information (the experience). Theory can be taught and learned from static sources through education and experience can be gathered at work. Consistent with the earlier studies (such as Bankston, 1976; Bemmels, 1990), Collan and Lianem (2005) reported that the knowledge of the theory and relevant practical experience could impact business decision-making. Judgment and decision-making in the auditing domain are similarly influenced by one’s knowledge and training experiences. Butt (1988) found that the frequency judgment accuracy in auditing tasks was influenced by the frequency knowledge of auditors and his/her familiarity (expertise or experience) with the auditing stimuli. Those auditors with better frequency knowledge and greater familiarity with the auditing stimuli were found to have more accurate frequency judgments. Other studies (Marchant, 1987; Bonner, 1990) similarly reported that task-specific knowledge and experience aided performance of the auditors. Fadzly and Ahmed (2004) also opine that occupational experience obtained from on-the-job training could also improve task-related decision judgment due to lessons learned through task performance. According to Humphrey, Moizer and Turley (1992), audit expectation gap is potentially caused by the lack of awareness of the role of the audit function and naivety of non-auditors. Epstein and Geiger (1994) also conclude that the lack of relevant knowledge and experience could lead to misperception of the audit function and contribute to the audit expectation gap. Hence, users who possess the appropriate accounting knowledge and experiences are likely to view the audit function in a manner more consistent with that prescribed in professional standards and statutes. Monroe and Woodliff (1993) had shown that the perception of students with regard to the auditor’s responsibilities and reliability of the audit report before the education period was significantly different from that after the education period. Based on their study, Monroe
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and Woodliff concluded that education could influence the financial statement user’s perception of the role of the audit function and that could narrow the reasonableness gap.
3
Theoretical framework and hypotheses
From prior studies (Marchant, 1987; Butt, 1988; Bonner, 1990; Monroe and Woodliff, 1993; Fadzly and Ahmed, 2004; Collan and Lianem, 2005), three individual factors are expected to affect the user’s perception of the auditor’s responsibility and reliability of the audited financial information. The individual factors are accounting qualification, accounting experience and occupational experience. Based on Libby’s (1979) decision-making framework, the user’s knowledge and experiences influence his/her perception of the role of the audit function and interpretation of the intended message conveyed in the audit report (link 1). The perceived role of the audit function and interpretation of the message in the audit report, in turn, influence user’s judgment of reliability of the audited financial information for decision-making (link 2) and finally, the extent of reliance of such information for decision-making determines the quality of decision outcome (link 3). In the case of a bank loan officer, his/her knowledge and experiences influence his/her perception of the role of the audit function and interpretation of the message in the audit report, and that, in turn, affect his/her judgment of the reliability of audited financial information for the decision-making. If he/she perceives the responsibility of the external auditor as higher than that defined in the statutes or professional standards, such as perceiving the auditor being responsible for providing absolute, rather than reasonable, assurance on the accuracy of the financial statement information, the bank officer would rely on the audited financial information to a greater extent in making loan assessment decision than the case had the bank officer known that the auditor is only required to provide reasonable, and not absolute, assurance on the accuracy of information audited. The difference between the bank officer’s perception of the auditor’s responsibility and reliability of the audited information and that defined in the relevant professional standards or statutes is used to measure the audit expectation (reasonableness) gap in this study. Existence of such expectation gap is expected to adversely affect the quality of the bank officer’s loan assessment decision. The relationship between the individual knowledge and experience-related variables and loan decision performance, is postulated to be mediated (or explained) by the audit expectation gap. The theoretical framework for this study is shown in Figure 2 and the three main hypotheses that were formulated and empirically tested in this study are as follows: H1: There is a negative relationship between individual knowledge and experience-related variables and the audit expectation gap. H2: There is a negative relationship between the audit expectation gap and loan decision performance. H3: The audit expectation gap mediates the individual factor-decision performance relationship.
Audit expectation gap and loan decision performance of Iran bank officers 317 Figure 2
4
The theoretical framework
Methodology
4.1 Sample and data collection This study used a structured questionnaire for data collection and data were analysed using a statistical package for the social sciences. Copies of the questionnaire were distributed personally by one of the researchers to 113 loan officers at the main branches of five large commercial banks in Iran.1 These five commercial banks account for nearly 60% of the banking resources in Iran. The other smaller banks were excluded from this study because they are development banks that are established to aid and promote specific industries or economic activities in Iran, and these banks are not directly involved in financing private investments. In addition, the loans granted by the selected five Iranian government-owned commercial banks are much larger in amounts than those granted by the other smaller financial institutions. The five large Iranian commercial banks have instituted formal procedures for processing of loan applications and they also engage financial and technical experts in their banking operations. In this study, bank loan officers were selected as respondents because they are relatively sophisticated users who often use the audited financial statements of loan applicants to assess their credit worthiness (Abu Bakar, Abdul Rahman and Abdul Rashid, 2005). The questionnaire for this study consisted of four sections. Section I gathered demographic, as well as knowledge and experience-related information of the respondent. Section II included items to assess the responsibility and reliability dimensions of the expectation gap. Section III focused on the performance indicators to measure loan decision quality and Section IV was used to solicit from the respondent factors that influenced his/her assessment of loan applications, as well as the extent and quality of the training provided by his/her employer. Multiple-item measures were used and each item was rated on a six-point Likert-liked scale, ranging from 0 (not at all/strongly disagree) to 5 (very much so/strongly agree). The items for measuring the responsibility and reliability dimensions of the audit expectation gap were adapted from prior studies
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(Best, Buckby and Tan, 2001; Fadzly and Ahmad, 2004; Dixon, Woodhead and Sohliman, 2006). Minor changes to the wordings were made to reflect the loan decision task setting. Indicators for measuring the loan decision quality were developed based on the suggestions of a few credit experts from the Iranian central bank. The questionnaire was pre-tested on several bank officers in Malaysia to assess the validity of items used for measuring each construct, as well as to ensure that the questions asked were free from ambiguity. Certain items in the questionnaire were revised or rephrased based on results of the pre-testing. The questionnaire was subsequently translated into the Iranian language and tested to ensure correct comprehension. Out of the 113 questionnaires distributed, 111 were completed and returned to the researcher. The near 100% response rate was largely due to the cooperation and support of the training department head of each bank.
4.2 Measurements of constructs 4.2.1 Audit expectation gap The responsibility and reliability dimensions of the audit expectation gap were examined in this study. The items used to measure the two dimensions were adapted from the earlier studies (Best, Buckby and Tan, 2001; Fadzly and Ahmad, 2004; Dixon, Woodhead and Sohliman, 2006). The level of each gap dimension was determined by the extent to which the respondent’s perception differed from that defined in the relevant Iranian professional auditing standards nos. 20, 24 and 70 (equivalent to ISA 240 and ISA 700). A rating scale which was divided into six intervals, 0 (not at all/strongly disagree) to 5 (very much so/strongly agree), was used to measure the extent of the gap. The statements for measuring perception of either the auditor’s responsibility or reliability of the audited statements were phrased in a manner opposite to that defined in the relevant professional standards, such that a ‘not at all/strongly disagree’ response implied no gap or no misperception, while a ‘very much so/strongly agree’ response implied a very large gap.
4.2.2 Loan decision performance The performance of the bank loan officer consisting of three performance dimensions was used to gauge loan decision quality. The three dimensions were: % of bad and doubtful debts, % of loans that defaulted the first three installments and % of loans that defaulted more than three installments.2 Six ranges of percentages, as suggested by the Iranian central bank’s credit experts, were used for measuring each loan performance dimension, and each respondent was asked to choose the percentage that was most representative of the performance outcome of his/her loan portfolio.
5
Results and discussion
5.1 Demographic profile of respondents As shown in Table 1, 75% of the respondents were male. The average age of the respondents was 36.5 years old and 76% of the respondents aged 40 years and below. The respondents were academically qualified as 98% of them possessed a bachelor
Audit expectation gap and loan decision performance of Iran bank officers 319 degree or higher. However, only 22% of the loan officers had majored in accounting. Among the non-accounting majors, 63% of them specialised in finance or other management disciplines and 43% of the respondents had no accounting experience. With respect to occupational experience, 73% of the respondents had worked for five or more years in the banking industry. The average years of accounting experience and occupational experience of the respondents were 3.71 and 8.28 years, respectively. Table 1
Profile of respondents Number of respondents
%
Gender Male Female Total Age
83 28 111
75 25 100
2130
30
27
55
49
26 111
24 100
2 88 21 111
2 79 19 100
24 87 111
22 78 100
21 35 19 13 88
24 39 22 15 100
14 years
48 34
43 31
59 years
10
9
3140 Above 40 Total Academic qualification High diploma Degree Post-graduate Total Majors Accounting Non-accounting Total Non-accounting majors Management (financial specialisation) Management (other specialisation) Economics Others Total Accounting experience 0 year
19
17
111
100
14 years
30
27
59 years
35
32
1029 years Total Occupational experience
1021 years Total
46
41
111
100
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5.2 Descriptive statistics 5.2.1 Audit expectation gap and loan decision performance The descriptive statistics for the audit expectation gap and its two dimensions are shown in Table 2. The overall mean score of audit expectation gap, which is the average of the two gap dimensions, is 2.85. The mean score of the responsibility gap and that of the reliability gap are 2.7 and 3.49, respectively. A fairly large audit expectation gap existed among the Iranian bank officers, as evidenced by the gap’s mean score of 2.85 (scale: 0 = no gap and 5 = extremely high gap). This finding is consistent with those reported in the earlier studies (Best, Buckby and Tan, 2001; Fadzly and Ahmad, 2004; Dixon, Woodhead and Sohliman, 2006). Bankers in Malaysia (Fadzly and Ahmad, 2004) and Egypt (Dixon, Woodhead and Sohliman, 2006) were found to incorrectly perceive the extent of assurance provided by the auditors and they expected the audited financial statements to be free of material misstatements. Best, Buckby and Tan (2001), on the other hand, found no evidence of the audit reliability gap in Singapore. However, Best, Buckby and Tan (2001), Fadzly and Ahmad (2004) and Dixon, Woodhead and Sohliman (2006) were consistent when reporting existence of a high auditor’s responsibility gap in Singapore, Malaysia and Egypt, respectively. Descriptive statistics for the overall loan decision performance and the three performance dimensions are presented in Table 3. The mean score for the overall loan decision performance, which is the average of the three performance dimensions, is 2.54. The mean score for bad and doubtful loans is 2.19, which is approximately equivalent to 15% of loans approved by the respondent. The mean score for loans that defaulted the first three installments is 2.81, which is approximately equivalent to 30% of the loans approved by the respondent. The mean score for loans that defaulted more than three installments is 2.97, which is approximately equivalent to 20% of the loans approved by the respondent. Table 2
Descriptive statistics for audit expectation gap and its two dimensions
Variable Audit expectation gap Responsibility gap Reliability/credibility gap
Mean score
SD
Minimum
Maximum
2.85 2.77 3.49
1.04 1.05 1.54
0.00 0.00 0.00
0.00 4.88 5.00
Scale: 0 = no gap; 5 = very high gap. Table 3
Descriptive statistics for loan officers’ overall decision performance and the three performance dimensions
Variable Overall loan decision performance (scale: 0 = very poor; 5 = zero loan default) Bad and doubtful loans (scale: 0 = >20%; 5 = 0%) Loans that defaulted the first three instalments (scale: 0 = >40%; 5 = 0%) Loans that defaulted >3 installments (scale: 0 = >60%; 5 = 0%)
SD
Minimum
Maximum
2.54
Mean
1.16
0.00
4.75
2.19 (#15%)
1.35
0.00
4.50
2.81 (#30%)
1.31
0.00
5.00
2.97 (#20%)
1.30
0.00
5.00
Audit expectation gap and loan decision performance of Iran bank officers 321 The reliability statistics, Cronbach’s D, for audit expectation gap and loan decision performance are 0.81 and 0.86, respectively; both of which are well above the minimum acceptable level of 0.60 suggested by Hair et al. (1998).
5.2.2 Relationship between individual factors and audit expectation gap The correlation matrix between the individual factors and the audit expectation gap is shown in Table 4. The correlations between the accounting qualification and the audit expectation gap and its two gap dimensions are negative and highly significant (all p 0.01). Accounting experience is also significantly and negatively related to the audit expectation gap (p 0.01) and its two gap dimensions (p 0.05). However, the correlations between the occupational experience and the audit expectation gap and its two gap dimensions are not significant. Accounting qualification is significantly correlated with accounting experience (p 0.01), but not with occupational experience. Accounting experience, on the other hand, is associated with occupational experience, but only moderately (p 0.05). Table 5 summarises the results of the multiple regression analysis of the three individual knowledge and experience-related factors on the audit expectation gap and its two gap dimensions. The results indicate that only accounting qualification is significantly and negatively associated with the audit expectation gap (t = 6.96, p = 0.00), as well as with the responsibility gap (t = 6.95, p = 0.00) and the reliability gap (t = 3.75, p = 0.00). Both the experience-related factors, accounting experience and occupational experience, are found to have no significant effects on the audit expectation gap. Even though accounting qualification and accounting experience are highly correlated, multi-collinearity statistics, as shown in Table 5, indicate that the tolerances are above 0.2 and the VIFs are below the generally acceptable critical threshold of 10, and the statistics suggest muti-collinearity is not a serious issue. Separate univariate regression analyses show that accounting qualification explains 35.8% of the variance of the audit expectation gap, while accounting experience and occupational experience only account for 6 and 0.8% of the variance of the gap. The results indicate that accounting qualification is the most significant predictor (mitigating factor) of the audit expectation gap. Therefore, hypothesis, H1 is only supported with respect to the accounting qualification variable, but not for the experience-related variables, accounting experience and occupational experience. A surprising finding in this study is the non-significant effect of the experiencerelated variables on the audit expectation gap. The finding implies that experiences gained from on-the-job training in both banking or other accounting settings are not able to significantly rectify bank officers’ misperception of the role and responsibility of auditors. This finding, however, may be peculiar only to the Iranian bank officers. Analyses of feedback from the loan officers on the extent and quality of in-house training provided by their employers indicate a rather grim picture on this aspect of human resource development in the five banks. With regard to the extent of in-house training provided by the five banks, 11% of the respondents admitted that their banks did not provide them with any in-house training, while 58% acknowledged that the level of training provided was “low” to “very low”. Similar responses were obtained on the quality of the training programmes provided to improve their decision-making skills; 12% indicated zero effect on their decision-making skills, while 47% stated the beneficial effect was “low” to “very low”. In addition, more than half of the respondents were from
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non-accounting and non-finance disciplines, suggesting that a large majority of the respondents might lack the foundation knowledge in accounting and finance. The poor foundation knowledge coupled with inadequate formal in-house training and poor content development for training programmes could have contributed to the apparent continuing misperceptions of these loan officers, despite their long duration of working experience. Table 4 Variables
Correlation matrix of the individual variables, audit expectation gap and the gap dimensions AQ 1 0.34**
AE
AQ AE OE
0.12
AEG
0.60**
0.25**
Resp.Gap
0.60**
Relia.Gap
0.38**
1 0.23*
OE
AEG
Resp.Gap
Relia.Gap
1 0.09
1
0.24*
0.101
0.99**
1
0.19*
0.001
0.67**
0.56**
1
AEG: audit expectation gap; AQ: accounting qualification; AE: accounting experience; OE: occupational experience; Resp.Gap: responsibility gap; Relia.Gap: reliability gap. **Significant at 0.01. *Significant at 0.05. Table 5
Dependent variable Audit expectation gap
Regression analysis of individual factors on audit expectation gap and the gap dimensions
Model Constant Accounting qualification Accounting experience
B
SE
t
3.05
0.16 0.21
6.96
1.44 0.02 0.02
Occupation experience R2 = 0.370; Adj R2 = 0.351 F = 20.833; P = 0.000 Responsibility Constant 2.95 gap Accounting qualification 1.46 Accounting experience 0.01
Reliability/ credibility gap
Occupation experience R2 = 0.368; Adj R2 = 0.35 F = 20.738; P = 0.000 Constant Accounting qualification Accounting experience Occupation experience R2 = 0.150; Adj R2 = 0.126 F = 6.298; P = 0.000
**Significant at 0.01.
0.876
1.14
0.830
1.21
0.02
0.88 1.27
0.38 0.21
0.938
1.07
0.16
18.13
0.00
0.21
6.95
0.00**
0.02
0.82 1.38
0.41
13.91
0.00 0.00**
0.02
0.02
3.82
0.28 0.35
1.33 0.21 0.01
Collinearity tolerance VIF
0.00 0.00**
0.02
0.03 0.03
18.94
Sig. (p-value)
3.75 0.74 0.12
0.17
0.46 0.90
Audit expectation gap and loan decision performance of Iran bank officers 323
5.2.3 The relationship between audit expectation gap and loan decision performance Table 6 summarises the regression results of the audit expectation gap on loan decision performance, as well as on the three performance dimensions. There is a highly significant and negative relationship between the audit expectation gap and loan decision performance (t = 2.82, p = 0.01), as well as between the audit expectation gap and each of the three performance dimensions (p 0.02). Therefore, hypothesis H2, is strongly supported and this study empirically shows that the audit expectation gap is a significant negative predictor of the bank officer’s loan decision performance. Table 6
Regression analysis of audit expectation gap on loan decision performance Sig. (p-value)
Dependent variable
Model
B
SE
t
Overall loan decision performance
Constant
3.38
0.32
10.66
0.00
0.29
0.10
2.82
0.01**
3.02
0.37
8.12
0.00
0.29
0.12
2.39
0.02*
3.64
0.36
10.10
0.00
0.29
0.12
2.44
0.02*
3.84
0.36
10.81
0.00
0.30
0.12
2.60
0.01**
AEG 2
2
R = 0.096; Adj. R = 0.06 F = 7.977; p = 0.006 Bad and doubtful loans Constant AEG 2
2
R = 0.05; Adj. R = 0.04 F = 5.706; p = 0.019 Loans defaulted first three installments
Constant AEG 2
2
R = 0.052; Adj. R = 0.04 F = 5.974; p = 0.016 Loans defaulted more than three installments
Constant AEG R2 = 0.059; Adj. R2 = 0.05 F = 6.742; p = 0.011
AEG: audit expectation gap. **Significant at 0.01. *Significant at 0.05.
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5.2.4 Mediating effect of audit expectation gap on the relationship between accounting qualification and loan decision performance Based on the procedure recommended by Baron and Kenny (1986), three regression equations were tested for linkages in the mediational model. First, the mediating variable (audit expectation gap) was regressed on the individual factor and that the individual factor must affect the mediator. In the earlier analysis, as reported in Section 5.2.2, only one individual factor, accounting qualification, has a significant effect on the mediating variable, audit expectation gap. Therefore, subsequent analyses only focus on the individual factor, accounting qualification, as the independent variable in testing this mediational model. The second equation must show that accounting qualification as the independent variable must affect the dependent variable and decision performance. Finally, in the third equation, the decision performance (dependent variable) was regressed on both the accounting qualification (the independent variable) and audit expectation gap (mediator) and the mediator must affect the dependent variable. As shown in Table 7, the conditions as specified in Baron and Kenny (1986) are all supported in the predicted direction. In the first equation, audit expectation gap (mediator) is significantly affected by the accounting qualification (the independent variable) (p = 0.00). In the second equation, decision performance (dependent variable) is also significantly affected by accounting qualification (the independent variable) (p = 0.01). The positive relationship between the accounting qualification and decision performance is consistent with the findings of Bonner (1990), Butt (1988) and Collan and Lianem (2005), even though these studies were based on different task settings. The third equation shows that the effect of accounting qualification (the independent variable) on decision performance (dependent variable) is less in the third equation than in the second. In fact, accounting qualification (the independent variable) is found to have no significant effect on decision performance (dependent variable) when the audit expectation gap (mediator) is controlled. This is evidence of a perfect mediation of the relationship between the accounting qualification (the independent variable) and decision performance (dependent variable) by the audit expectation gap (mediator). Hypothesis, H3, therefore, is fully supported. Table 7
Summary of regression analyses for testing the mediational model
Dependent variable
Independent variable
t
Sig. (p-value)
B
SE
Accounting qualification
1.508
0.194
7.784
0.00**
Accounting qualification
0.666
0.266
2.50
0.01**
First equation: Audit expectation gap R2 = 0.357; Adj. R2 = 0.351 F = 60.586; p = 0.000 Second equation: Decision performance R2 = 0.055; Adj. R2 = 0.046 F = 6.25; p = 0.014
Audit expectation gap and loan decision performance of Iran bank officers 325 Table 7
Summary of regression analyses for testing the mediational model (continued)
Dependent variable
Independent variable
B
SE
t
Sig. (p-value)
0.347
0.327
1.062
0.29
0.214
0.129
1.662
0.09*
Third equation: Decision performance
Accounting qualification Audit expectation gap
R2 = 0.078; Adj. R2 = 0.061 F = 4.557; p = 0.013 **Significant at < 0.05. *Significant at 0.10.
6
Conclusion and implications
This study examines the effect of bank officers’ knowledge and experiences on audit expectation gap and how the expectation gap impacts their loan decision performance. In this study, audit expectation gap acts as an intervening variable between the individual knowledge/experiences and decision performance, and audit expectation gap is postulated to mediate the relationship between the individual factor and decision performance. Using loan officers from five large Iranian commercial banks as respondents, the results indicate that the accounting qualification is a significant predictor (or mitigating factor) of the audit expectation gap. Loan officers with accounting qualifications tend to perceive the auditor’s responsibility and reliability of the audited financial information in a manner that is more consistent with those prescribed in the professional standards. Surprisingly, this study found no significant mitigating effect of work-related experiences on the audit expectation gap. This finding may be peculiar only to the bank officers of the five Iranian banks, as subsequent analyses indicate the extent and quality of in-house training in these banks were generally low, with minimum impact on the decision-making skills of those bank officers. An important contribution of this study is the strong empirical evidence that it provides regarding the significant negative relationship between the audit expectation gap and bank officer’s loan decision performance. The findings of this study may have important policy implications for the recruitment and training of the bank loan officers. This study shows the importance of the accounting knowledge in mitigating misperception of the audit function and hence, the accounting qualification criterion may have to be emphasised in the future recruitment of bank loan officers. In addition, appropriate content development for in-house training programmes is also crucial for improving bank officers’ understanding of the role of the audit function for gauging reliability of the audited financial information for more effective task performance. Political, cultural and environmental factors could affect loan assessment processes, as evidenced by the relatively high percentage of bad and doubtful loans in the five Iranian banks as compared to that normally experienced in the more developed countries. The higher percentage of bad and doubtful loans might be due to greater political interference in the loan approval processes of these five government-owned commercial
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banks in Iran. However, these external factors were controlled in this study because only responses from loan officers in Iranian government-owned commercial banks were analysed. Being government-owned commercial banks, the procedures and policies with respect to loan processing in the five Iranian banks are also expected to be quite similar. As such, operational differences among the five banks are not expected to be significant to render the results of this study invalid. Nevertheless, due to the small sample size and the selection of respondents being confined to only those working in the main branches of the five large Iranian banks, the findings of this study must be interpreted with caution as they may not be generalisable to the other smaller Iranian banks or banks in other countries or other cultural settings. Future research could be based on other economic, cultural and political settings to verify the expectation gapperformance relationship to enhance our understanding of the impact of audit expectation on loan decision performance.
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Notes 1
The banks were Melli, Mellat, Saderat, Tejarat and Sepah located in Iran’s capital city, Tehran. 2 A fourth performance dimension, loans approved but rejected by supervisor, was omitted after the follow-up discussions with the training department heads. According to them, loan officers might be less objective in responding to this indicator because a “high rate of rejection by supervisor” would reflect badly on his/her loan assessment ability. The other three dimensions were considered as acceptable because bank officers would not know the cut-off % for both bad/doubtful loans and failed installment payments for gauging poor performance.
