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Although auditor-client interaction is considered an important determinant of financial reporting outcomes, concerns often arise that close working relationships between auditors and client managers can impair auditor independence. Several high-profile accounting scandals have intensified these concerns, impaired investors’ confidence in the financial reporting process and motivated regulators to respond with reforms to enhance auditors’ responsibility for maintaining financial reporting quality. Subsequent reports from the financial press indicate that these reforms had a chilling effect on the auditor-client relationship, but academic research has not examined the influence of regulatory scrutiny on the resolution of material accounting issues between auditors and managers. This study contributes to the literature by investigating the impact of regulatory scrutiny on auditors’ approach to resolving material accounting issues with managers and examining whether this impact is moderated by managers’ commitment to their preferred accounting. Auditors’ interaction approach involves developing arguments and recommendations in response to managers’ accounting preferences in an attempt to persuade managers to adopt more appropriate accounting. The results of an experiment with experienced auditors indicate that regulatory scrutiny and managers’ commitment to their preferred accounting interact to influence auditors’ interaction approach. Specifically, when regulatory scrutiny is low, reciprocity norms determine auditors’ interaction approach but, as regulatory scrutiny increases, accountability demands dominate auditors’ reciprocity motivations and modify auditors’ responses to managers’ accounting preferences. These results provide evidence that regulatory scrutiny introduces tension into the auditor-client relationship, but the effects of this tension on the resolution of material accounting issues is contingent on the interpersonal context. / Accounting

Audit is a bilateral task where the auditors are required to socially interact with their clients during the audit process. The auditor and client may encounter different expectations that could lead to challenges in their social interaction. Thus, the purpose of this study is to explore the challenges in the social interaction between the auditor and client during the audit process. Prior literature has applied versions of agency that are implicitly based on classic contract law and virtually ignored clients as a research object. The original value of this study lies in the adoption of the dramaturgical analysis into the context of audit. This study employs a qualitative research method. Semi-structured interviews were conducted with seven real auditor-client dyads in Scania, Sweden. The findings suggest that clients are fixated on the price tag of an audit and do not consider the person delivering the audit service. This puts the auditor and client at risk as the findings suggest that the social interaction is important whereby a similarity attraction in sociodemographic space facilities the social interaction. Asset evaluations can create challenges in the social interaction which are solved with residual control stemming from ownership as well as social status. The seven auditor-client dyads in this study deals with their own unique challenges that resulted in seven prototypes. This study fills in a gap in the literature by interviewing and analyzing the auditors’ respective client expectations on one another. To fulfil each other’s diverse expectations, both must embody different roles.