November 2008

When auditors issue adverse opinions of a company’s internal controls, bank loan officers take note.

They are less likely to extend businesses a line of credit, according to a study conducted by Georgia Tech accounting professors Bryan Church and Arnold Schneider that was published in the Journal of Accounting and Public Policy.

“The disclosure of material weaknesses suggests that management’s oversight may be lacking, and in turn, the risk associated with the financial data may be heightened,” the researchers write.

These disclosures reduce lenders’ confidence that financial statements are presented fairly in conformance with generally accepted accounting principles, Church and Schneider note.

Church holds the Arthur O. Brannen Professorship, and Schneider is the area coordinator for accounting at the College of Management.