The Effect of Auditors’ Informal Communication in the Audit Environment on Financial Reporting Outcomes

I examine the effect of auditors’ recurring, informal communication with managers and other auditors on financial reporting outcomes in a laboratory experiment in which participants in the roles of auditors and managers interact in a stylized audit setting. My 2×2 between-subjects design manipulates whether the auditors are able to informally communicate with either, neither, or both the manager and other auditors. I find that when the auditor and manager informally communicate, they each develop a social bond, which increases the manager’s feeling of accountability towards the auditor, causes the manager to make more honest representations to the auditor, and leads the auditor to assess the manager’s representations as more honest. Additionally, while the auditor’s informal communication with other auditors creates a social bond among auditors, this bond neither reduces the strength of the auditor’s bond with the manager nor reduces the effect of that bond on the auditor’s assessments of the honesty of the manager’s representations. My study highlights the importance of the social nature of auditing and its impact on financial reporting outcomes and has implications for practitioners and regulators