Social Capital and Audit Quality: Does Auditors’ Social Network Matter? Evidence from Private Firms

• In Event: Auditor Judgment

Abstract

Auditors do not work in a vacuum. They rather interact with other auditors inside and outside their audit team and become a part of a professional network. This study investigates whether social capital accumulated within this professional network affects audit quality. In order to do that, we use two dimensions of social capital. On one hand interactions outside the audit team generate external social capital. On the other hand interactions inside the audit team generate internal social capital. We use the Italian institutional setting as a “natural laboratory”. By means of a unique sample of private firms we provide empirical evidence that external social capital has a positive effect on audit quality, whereas internal social capital has a negative effect. Taken together these results suggest that clients firms benefit from their auditors’ connections beyond the audit team. However when audit team members are cohesive, clients firms suffer for a potential impairment of auditors’ professional skepticism.

Authors

• Pietro Andrea Bianchi, IE University

• Marco Trombetta, Instituto De Empresa