Analyzing the Impact of Auditor-Client Familiarity on Professional Skepticism and Audit Objectivity

Posted: Feb 04, 2020

• Kara Sullivan
• Xavier Holt
• Liam Rivera

Abstract

The fundamental tension between auditor-client familiarity and professional skepticism represents one of the most enduring dilemmas in audit practice and regulation. Traditional audit theory posits that increasing familiarity between auditors and their clients inevitably compromises objectivity through the development of personal relationships, cognitive biases, and economic dependencies. This assumption underpins mandatory audit partner rotation policies implemented globally, including the Sarbanes-Oxley Act requirements in the United States and similar regulations in international jurisdictions. However, emerging evidence suggests this relationship may be more complex than previously conceptualized, with potential benefits of client-specific knowledge and experience potentially offsetting the risks of familiarity threats. Our research challenges the linear assumption that increasing familiarity uniformly diminishes professional skepticism. Instead, we propose and test a curvilinear model where moderate levels of familiarity may actually enhance auditors' ability to exercise appropriate professional skepticism through deeper understanding of client operations, industry nuances, and historical context. This reconceptualization has significant implications for audit regulation, firm quality control policies, and audit committee oversight practices.