A Model of Professionally Motivated Investment in Auditor-Client Relationship-Building

This paper presents a model of auditor-client relationship-building (RB). We find that the relation between RB and audit effort is nonmonotonic, that is, it can improve or impair audit effort. On the one hand, RB improves the usefulness of exerting effort and the auditor is then motivated to work harder. On the other hand, RB improves the precision of the signal received by the auditor and reduces her expected liability, which reduces her incentive to exert effort. Moreover, existing literature suggests that quasirents arising from long auditor tenure compromise auditor independence. In contrast to this conventional wisdom, this paper shows a positive effect of quasirents resulting from relationship-building on auditor independence under certain conditions. This is the first study modeling client relationship-building initiated by auditors. It enhances our understanding of the relationship between RB and audit effort as well as auditor-client negotiations.