To audit or not to audit : How is auditing being used in banks' credit rating processes?

Abstract: Credit rating systems are complex processes and involve mainly two parties; a company and a bank. The complexity of a relationship between a company and a bank lies in the fact that a company usually has access to more information about the company than the bank. Hence, an auditor acts as a third party who validates the information involved in credit rating processes. The purpose of this dissertation is to explore how auditing is being used in credit rating processes and to identify the role auditing has. In addition, this study recognizes the use of auditing in both Denmark and Sweden, with a goal to compare and explore the differences between the countries. In order to collect secondary data, Danish and Swedish banks were interviewed. To be able to explore the rather newly discovered relationship between auditing and credit rating processes, this study was carried out with an exploratory research design. In addition, this study is based on assumptions stated in the Agency Theory, the Positive Accounting Theory and the Stakeholder Model. Because the intention was to use existing theories, a deductive research approach was suitable. The empirical findings imply that auditing is being used in banks’ credit rating processes to validate the information and to reduce the risk. The trustworthiness of auditors and the relationship between a company and a bank influence banks’ perceptions regarding the creditworthiness of companies. The role of auditing is rather common in Denmark and Sweden, whereas the amount of accessible information is higher in Sweden than in Denmark. The pattern is that more information diminishes the risk and implies that the role of auditing is less important. This study is limited to only taking the bank’s perceptions of auditing into consideration, leaving out other stakeholders. Moreover, the examination is restricted to Danish and Swedish banks. The findings are interesting for banks and small companies to consider, because they explain the importance of auditing other components such as customer relationship. As a conclusion, the findings would be appropriate for Swedish banks to review in order to evaluate possible consequences of the statutory audit.