The effect of auditors’ informal communication on manager behavior

Abstract

Auditors informally communicate with both client managers and fellow audit team members throughout an audit. I examine the separate effects of these informal communications on managers’ strategic behavior using a laboratory experiment in which participants in the roles of auditors and managers interact in a stylized audit setting. I find that informal auditor-manager communication strengthens managers’ social bonds with auditors, which results in fewer aggressive accounting choices by the manager. Moreover, these stronger social bonds result in greater honesty about aggressive accounting choices when they do occur. While informal communication causes auditors to reduce audit effort, I show that the auditors’ choice is appropriate because of the positive influence the managers’ social bonds have on manager behavior, ultimately reducing instances of audit failure. My study demonstrates that auditors can strategically use informal communication with managers to strengthen auditor-manager social bonds that in turn benefit the audit through preferable manager behaviors.