Client Relationship-Building and Audit Quality
Posted: 18 Aug 2017 Last revised: 4 Jul 2023
Date Written: July 3, 2023
Abstract
This paper presents a model of auditor-client relationship-building (RB). We find that the relation between RB and audit effort is non-monotonic, i.e., it can improve or impair audit effort. On one hand, RB improves the usefulness of exerting effort and the auditor is then motivated to work harder. On the other hand, RB improves the precision of the signal received by the auditor and reduces her expected liability, which reduces her incentive to exert effort. Moreover, existing literature suggests that quasi-rents arising from long auditor tenure compromise auditor independence. In contrast to this conventional wisdom, this paper shows a positive effect of quasi-rents resulting from relationship-building on auditor independence. This is the first study analyzing the impact of client relationship-building initiated by auditors on audit quality. It enhances our understanding of the impact of RB on audit quality.
Keywords: client relationship building; audit effort; audit reporting quality
JEL Classification: M42; M48
Suggested Citation: Suggested Citation