A STUDY OF THE USEFULNESS OF SELECTED GAAP BASIS ACCOUNTING INFORMATION AND ITS ACTUAL USE IN THE SMALL PRIVATE COMPANY LOAN DECISION PROCESS

Segments of the business commmunity and the accounting profession have become increasingly concerned about the quantity and complexity of generally accepted accounting principles. The fundamental problem is that the financial statements of small private companies may be too complex. Prior studies have gathered data from loan officers in large commercial banks. This study gathers data from loan officers of banks with $50 million to $150 million in deposits. It examines the usefulness of selected GAAP basis accounting information items in the small private company loan decision process and assesses the attitudes of commercial bank loan officers regarding the use of GAAP basis accounting information. Questionnaires were mailed to 176 banks chartered in Iowa, Nebraska, and South Dakota; 109 usable responses were received. The questionnaire requested that the loan officers rate the usefulness of twenty-nine accounting information items and respond to nine general accounting questions. By utilizing a case study, detailed verbal protocols were developed to analyze the specific decision process followed by eight loan officers. These verbal protocols were designed to identify the accounting information actually used. Of the twenty-nine information items evaluated, seven are perceived as highly useful, sixteen, intermediately useful and six, not useful. The verbal protocols substantiated all but three of the usefulness ratings. The loan officers agree that they: (1) receive GAAP basis financial statements but routinely accept financial statements prepared using another basis, (2) have different information needs for small private companies, (3) believe that the financial statements of small private companies are less useful than those of large public companies and are not cost efficient and (4) believe that differential measurement and differential disclosure should be permitted. The loan officers also agree that the usefulness of the information items varies with the characteristics of the loan request. Contradictions with other studies are noted. Further research directed toward modeling the small private company loan decision process is recommended