Auditor-Client Communications: Industry Implications for Engagements

 

Likely it comes as no surprise that communication between auditors and their clients comprises a significant portion of the audit engagement. And auditors, not unlike service professionals within other industries, experienced shifts in available communication methods in recent decades with the advent of new communication technologies. 

However, when it comes to email in particular, one study found that audit partners have two concerns when associate auditors use that method of communication. Partners seek to build and maintain client relationships and believe in-person conversations do that best. Second, they believe that nonverbal cues in face-to-face and video communication, or media-rich communications, help auditors to interpret the truthfulness of managers’ responses. The veracity of these client responses, and the auditor's ability to identify a low-quality response, have major implications for a successful audit engagement. But does in-person and video communication truly result in higher quality interactions between clients and auditors therefore better auditing outcomes?

Another Look

To help answer this question, University of San Diego Assistant Professors Mary Parlee Durkin, PhD, and Sarah Lyon, PhD, along with co-author and Professor Susan Jane Jollineau, PhD, at Chapman University, published a study in Auditing: A Journal of Practice and Theory to examine precisely whether auditors assess the quality of client explanations and decide to follow-up based on communication modes that vary in media richness, and second, whether priming an auditor for media-rich communication encourages the kind of skepticism needed to perform a successful audit. The implication for industry becomes, does relying on email communication, with very little media richness, compromise the quality of the information obtained from the client?

“Auditors frequently communicate with their clients in-person,” explained Professor Durkin. “Our current research, however, indicates that these face-to-face communications can cause a level of distraction that impedes the quality of auditor performance. We posit that email communication is under-appreciated and has multiple benefits.” 

The professors predict that for their study, email communication, compared to video communication, will enable the auditors to better assess the quality of the client’s response, by reducing distraction and enabling a focus on the content of the communication. The professors also predict that when media-rich communication like in-person or video communication is needed, auditors can be primed to better assess the quality of the client’s response.

Industry Application

Auditors are often required to audit the client’s assertions that account balances are appropriately valued. An audit associate tasked with this objective might start by asking a client to explain the valuation of the account balance. The auditor then seeks to corroborate the client’s explanation, gathering facts to support or refute the valuation of that account. However, client explanations vary in quality, and past research clearly indicates that individuals are prone to accepting explanations more readily than is warranted by their quality or evidentiary value.

Study Design & Findings

In the study, an experiment is conducted and includes the client providing a vague and incomplete response to the auditor. The auditor’s assessment of the quality of that response (based on reasonableness, usefulness, completeness, and vagueness) and their assessed likelihood of follow-up, demonstrates professional skepticism or lack thereof. When the client describes the response as an “explanation” of the inventory valuation and auditors receive this information via video, auditors assess the quality of the response as higher than when the response is described as “facts” or when it is received by email. In this important and common situation, auditors are less likely to follow up with additional questions. The study also found that auditors in the video explanation scenario planned to ask significantly fewer questions in their follow-up. This suggests that the quality of the follow-up, not merely the likelihood of follow-up, could vary depending on how skeptical auditors are of the initial explanation from the client. 

Implications for Auditing Engagements

Findings suggest that when auditors seek an explanation, there may be an underappreciated benefit in using email. The benefits of email could be especially relevant to the auditing profession given changes to the work environment resulting from the COVID-19 pandemic. The findings can also assist auditors in evaluating the most appropriate medium for communication.

For these post-pandemic auditor-client interactions, the Professors’ recommendation is consistent with a prior study’s implications to match the media with the task. When in-person interactions are needed, their research suggests that audit associates should be trained to consider the way they pose the question to the client as it may affect how the client characterizes their response, and how the auditor processes the response from the client. While auditors cannot completely control client responses, they can use the prime of “facts” to focus on the task, reduce distractions, and maintain the appropriate skepticism. 

“Audit firms could consider templated guides for associate auditors to utilize when making client inquiries,” said Professor Lyon. “For face-to-face meetings, for example, auditors could provide a form to the client to list relevant facts about the issue prior to meeting. This would allow the auditor to process the information in a low distraction setting while potentially preserving relationship building.”

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Sources

• American Accounting Association, Email versus In-Person Audit Inquiry: Recent Research and Additional Survey Data 
• Accounting, Organizations & Society, Staff auditors' proclivity for computer-mediated communication with clients and its effect on skeptical behavior

Mary Durkin is an assistant professor of accountancy at the University of San Diego's Knauss School of Business. She is a licensed CPA with research interests in auditor judgment and decision making.

Sarah Lyon is an associate professor of accountancy at the University of San Diego's Knauss School of Business. Her research interests include tax avoidance, auditor judgment and decision making, audit quality and deception.