The Effect of Auditors’ Informal Communication in the Audit Environment on Elements of Financial Reporting Quality

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Abstract

This study examines the effect of auditors’ ongoing, informal communication with managers and other auditors on elements of financial reporting quality. I investigate the processes by which this informal communication impacts auditor and manager decisions. I explore my research questions in a laboratory experiment in which participants in the roles of auditors and managers interact in a stylized audit setting. I manipulate whether the auditors are able to communicate with either, neither, or both the manager and other auditors in a 2x2 between-subjects design. I find that when the auditor and manager communicate, they each develop a social bond with the each other. The manager’s social bond with the auditor in turn increases the manager’s feeling of accountability towards the auditor as well as causes the manager to make more honest disclosures to the auditor. Furthermore, the social bond between the auditor and manager leads the auditor to assess the manager’s disclosures as more honest. I also find that the auditor’s communication with other auditors develops a bond between auditors. However, I observe that the auditor-to-auditor communication neither reduces the strength of the auditor’s bond with the manager nor reduces the effect of that bond on the auditor’s assessments of the honesty of the manager’s disclosures.

Author

• Emily Kathryn Hornok, The University of Mississippi