The Effects of Auditors' Trust in Client Management on Auditors' Judgments

This dissertation presents the results of three research studies investigating the role trust plays in an auditor's decisions. The first study examines whether auditors develop trust in a client's management after working with the client during prior audit engagements. The results indicate that auditors have higher trust in the client's management after a positive, overall satisfying experience working with the client compared to a negative, overall unsatisfying experience. The first study also investigates whether auditors" trust in a client affects their audit decisions. The results show a negative relationship between auditors" trust and their fraud risk assessment. Specifically, lower levels of trust are associated with higher levels of risk, and vice versa. Together, the results suggest that auditors may indeed develop trust in a client's management and this trust may affect their audit decisions.

The second study examines whether Certified Public Accountants’ (CPAs) level of moral reasoning affects their decision to trust a client's management and the extent to which to trust them. The results show that CPAs with relatively higher levels of moral reasoning have less trust in the client's management than CPAs with relatively lower levels of moral reasoning. The findings indicate that an auditor's decision to trust a client's management is, at least in part, an ethical judgment. Also, because the decision is an ethical one, the findings suggest that trust beyond some threshold would be considered unethical.

The third study extends the results of the first study by simultaneously examining how an auditor's trust and the financial importance of the client affect the auditor's decision to accept the client's preferred method of recognizing revenue. The results indicate that auditors" trust in the client's management is positively related to their commitment to the goal of supporting the client's preferred reporting methods (goal commitment), which in turn is positively related to the auditors" assessments of the acceptability of the client's methods for reporting purposes. The importance of the client did not affect auditors" goal commitment or their acceptability assessments. The findings suggest that auditors with higher levels of trust may be more likely to accept the client's preferred method of financial reporting.

Overall, these results add to our knowledge of audit judgment and decision-making by providing evidence that auditors do indeed develop trust in a client's management; that the decision and extent to trust the client is in part an ethical judgment; and that auditors" trust may affect their audit decisions. This dissertation highlights the important role that an auditor's trust plays in his or her audit decisions.