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• W29530721 abstract "For most small businesses, the ability to obtain bank financing is an essential element of continued survival and growth. Typically, the borrowing process requires that the borrower provide audited financial information to bank loan officers. Recent actions taken by the American Institute of Certified Public Accountants (AICPA) allow CPAs to issue present fairly opinions on audited financial reports prepared on an income-tax basis (AICPA 1989). The AICPA's purpose in permitting use of the income-tax basis is to reduce the prohibitive cost to small businesses of financial reporting in accordance with generally accepted principles (GAAP). The cost of providing audited financial information depends largely on the nature and extent of services utilized. Since income tax returns must be prepared, the use of income-tax-basis financial statements could be a cost-effective reporting alternative to GAAP for many small businesses (O'Dell and Cohen 1991). Therefore, when they seek credit some small businesses may find that the use of income-tax-basis financial reports will reduce overall borrowing costs. However, cost savings realized from using the income-tax basis reporting format may be more than offset by additional costs imposed by lenders during credit-worthiness evaluations if negative perceptions related to the income-tax-basis emerge. For example, since the income-tax-basis report does not contain the same information as a GAAP-basis report (such as the statement of cash flows), potential creditors might request additional information beyond the report. Also, lenders may require greater interest premiums if perceptions of greater risk are associated with income-tax-basis reports. Providing additional information beyond the financial statements and payment of larger interest premiums would, of course, involve additional cost to the borrower. This would tend to reduce or eliminate anticipated savings from using the income-tax-basis reporting alternative. The purpose of this study is to examine lenders' perceptions of risk, the usefulness of the financial statements in lenders' credit evaluations, and the need by lenders for additional information beyond that found in the financial statements. With income level effects controlled, a comparison is made of lender perceptions regarding audited income-tax-basis financial statements vis-a-vis GAAP-basis financial statements. Community size (found to be a pivotal demographic variable) as a characteristic of lenders is also addressed. BACKGROUND Nair and Rittenberg (1982) determined that lenders are the most likely users of audited financial reports of small businesses. However, there is a gap in the literature concerning the impact of audited income-tax-basis financial statements on lenders' perceptions of financial reports. Until recently, the use of audited financial statements meant that financial reporting had to comply with standards as promulgated by the Financial Accounting Standards Board (FASB). As the FASB continues to issue a new standard on an average of approximately every 60 days(1), complaints concerning the increasing costs of complying with these standards have escalated (Hepp and McCrae 1982, O'Dell and Cohen 1991). This situation is of particular concern to owners of small businesses who maintain that some standards (1) are not relevant to their specific business or user group, (2) do not improve decision making, and/or (3) are not justified on a cost-benefit basis. Studies by the FASB, the AICPA, and others have also concluded that accounting standards is a significant problem in financial reporting by small businesses.(2) In an effort to address the standards overload issue, the AICPA published Other Comprehensive Bases of Accounting (1986) to give practical guidance to accountants in preparing reports for uncomplicated nonpublic entities that prepare their financial statements on a comprehensive basis of other than GAAP. …" @default.
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• W29530721 title "Lenders' Perceptions of Income-Tax-Basis Financial Reporting by Small Business" @default.
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