Contingent perspective on the auditor-client relationship: a new determinant of audit quality

Agency theory, which emphasises the importance of auditor independence, has dominated auditing research for many decades. Under this theory, the dyadic contractual relationship between auditor and client is perceived as undesirable because it is seen as biasing the auditor towards their clients. We call for a re-evaluation of the impact on audit quality of the auditor-client relationship, based on important insights from sociology, in particular drawing on the literature on social exchange theory. We suggest that, while agency theory remains applicable in the domain of public interest entities (and other settings that include separation of management and ownership), social exchange theory is more closely applicable to small and medium-sized entities (in non-PIE settings) that value a relational approach over a transactional approach. Therefore, we argue that a contingent perspective should be applied. Subsequently, the contribution of a high-quality auditor-client relationship towards audit quality requires audit firms and individual auditors to implement both individual and organisational controls to maintain objectivity. Our analysis suggests that the benefits for audit quality of a good auditor-client relationship may have been underrated by auditors as well as audit clients.