Bankers’ reliance on financial statements in granting financing facilities : a case study of a Maltese bank

Abstract

Purpose: The fact that bank lending is the primary source of financing used by Maltese businesses has lead the author to embark on a study in an attempt to identify the extent to which the information depicted in financial statements satisfies bank lending officers’ needs when they are assessing a loan proposal. Design: A qualitative approach was used in this single case study where the author sought to reach the objectives by conducting a number of semi-structured interviews with bank managers. Secondary sources were also used in connection with the findings that emerged. Findings: Without financial statements bank managers do not engage in discussing a lending proposition. This implies that a set of financial statements is a fundamental source of financial information referred to by this category of users. From the interviews conducted, it emerged that bank managers are after the operational results of a business meaning that they take an income statement approach which implies that the historical cost accounting (HCA) method of measurement in financial reporting is preferred by them. Interviewees remarked that at times, earnings are managed upwards by businesses so as to put themselves in a better position to get the financing needed or to avoid corrective actions by the bank. The management of earnings tends to take place through the manipulation of trade receivables and inventory. This, along with the need to look at the whole context of the business, has lead bankers to ask for information beyond that shown in financial statements. Indeed, bankers require increased disclosures coming in the form of internal management information before proceeding with financing a business. Conclusions: The shift towards a fair value accounting (FVA) paradigm by the IASB presents a conflict between the Boards’ direction and bankers’ user needs. In light of this, one questions whether the adoption of international accounting standards was the right thing to do or whether the Plan Comptable General, which is characterized by HCA, would have been more appropriate. Implication: The profession in Malta should embark on an educational programme helping bankers to recognize the informational value of FVA. Moreover, it should raise awareness on the importance of ethical consideration when drafting a set of financial statements.