Eliminating 'subject to' audit qualification, contradictory standards, and assessment of risk

Sixty-four experienced Canadian bank loan officers participated in two experiments that aimed at evaluating the effects on assessment of risk of the "subject to" audit qualification. Each experiment required a sequence of judgments about long term loans to each of three companies. Judgments were requested over a (simulated) period of three years. The research design permitted manipulating the nature of contingencies, the combination of contingency disclosure and audit qualification, the resolution of those contingencies, and the presence of contradictory standards between the U.S. and Canada for cross listed companies.The findings (using ANOVA and multiple comparisons) are consistent with the hypothesis that the existence (or absence) of disclosed con- tingency, not the "subject to" audit qualification, is the primary influencing factor in the assessment of risk by bank loan officers.Furthermore, the findings indicate that bankers assign a lower weight to the audit opinion (as a source of uncertainty assessment) than to analysis of profitability, liquidity and solvency using the company's financial history. Finally, while the AICPA continues to debate itsmerits, Canadian bankers have adapted to the elimination of the "subject to" audit qualification by becoming more inquisitive about footnote disclosures.