The article "Differential Reporting and the Effect on Loan Evaluations: An Experimental Study" by Kent and Munro (1999) investigates whether simplified financial reportingknown as differential reportingaffects the decisions of loan officers when they evaluate a company's creditworthiness. At the time, standard setters were debating whether small, privately held companies should be allowed to use reduced versions of GAAP to lower compliance costs while still meeting the needs of statement users. The authors aimed to address a key question in this debate: Does differential reporting reduce the usefulness of financial information for lending decisions? To answer this, they conducted a controlled laboratory experiment using practicing loan officers or individuals trained in credit assessment. Each participant reviewed one of two versions of the same company's financial statementseither a full GAAP-compliant version or a simplified, non-GAAP version resembling the proposed differential reporting model. Participants then evaluated the company's ability to repay a loan and identified any additional information they required before making their final decision. This method allowed the researchers to isolate the impact of reporting format while keeping the underlying financial data identical across groups.

The evidence came from the loan officers' numerical credit ratings and the supplementary information they requested. The results showed that loan officers' judgments of repayment ability were not significantly different whether they used full GAAP statements or simplified ones. This finding suggests that reduced disclosures did not impair their ability to assess credit risk. However, participants who viewed the non-GAAP statements consistently requested more additional information than those who viewed full GAAP statements, indicating that simplified reporting increased their need for clarification or reassurance. In short, differential reporting did not change the final credit decision, but it did change the amount of work required to reach that decision.

Based on these findings, Kent and Munro concluded that differential reporting does not harm decision usefulness in the lending context, though it may increase the effort required by users. This conclusion is well supported by the experiment's results. Loan officers routinely deal with incomplete or varying levels of information, and the study demonstrates that they compensate by requesting further documentation rather than making poorer decisions. Although the experimental setting cannot fully capture all aspects of real-world lendingsuch as ongoing borrower relationships or additional contextual informationthe results are logical and practically relevant. The study reinforces the cost-benefit argument for differential reporting: full GAAP may impose unnecessary burdens on small private firms, and simplified reporting can still provide enough useful information for informed lending decisions. Overall, the authors provide convincing evidence that differential reporting can be a viable and effective approach within GAAP frameworks.

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