Socially Distant in the Age of Audit Independence: Rethinking the Impact of Social and Economic Ties on Audit Quality
Audit independence and audit negotiation research streams reach different conclusions regarding the impact of social ties on audit quality. Research on audit independence and professional skepticism treats independence rules as a mitigating factor to detection risk, suggesting that social cohesion between members of the audit triad (the audit committee, auditors, and company management) decrease audit quality. Audit negotiation research, however, suggests that social ties among the audit triad increase audit quality. The contradictions between these research streams suggest that both benefits and costs are associated with these interpersonal relationships. By framing the decision-making in an audit as a cost-benefit analysis, this study indicates that neither the presence nor the absence of social cohesion influences audit quality; instead, there is a prime level of social cohesion at which audit quality peaks. Using the Audit Risk Model as a construct, I apply Social Exchange Theory to explain the cost-benefit of social relationships within the audit process. I develop two hypotheses suggesting an inverted u-shaped relationship between social cohesion and audit quality and that economic ties moderate such links. To test this hypothesis, I perform a series of regression analyses to measure these effects using publicly available data. The findings infer that an inverted u-shaped relationship exists between audit quality and social cohesion and that economic ties strengthen such social cohesion.
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