Richard 2006

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Why an auditor can't be

competent and independent: A
french case study
a
Chrystelle Richard
a
Paris Dauphine University, France
Published online: 08 Feb 2011.
To cite this article: Chrystelle Richard (2006) Why an auditor can't be competent and
independent: A french case study, European Accounting Review, 15:2, 153-179, DOI:
10.1080/09638180500104832
To link to this article: http://dx.doi.org/10.1080/09638180500104832
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European Accounting Review
Vol. 15, No. 2, 153 –179, 2006
Why an Auditor can’t be Competent

and Independent: A French Case
Study
CHRYSTELLE RICHARD
Paris Dauphine University, France
ABSTRACT This research proposes an understanding of the role of the relationship

between the finance director and the auditor in the audit process and its effect on audit
quality. We adopt an interpretative and qualitative approach. Based on 60 interviews,
this qualitative method is the object of an interpretative process, composed of two
complementary theoretical fields: contractual economic theories and economic
sociology. Two notions emerge from this process, which are considered as the
interpretation bases: relationship dualism (professional/personal relationship) and
hybrid trust. This interpretative conception leads to a redefinition of the relationship
between a finance director and an auditor as a peers’ relationship. The emergence
conditions of a peers’ relationship are the sharing of professional and cultural norms,
the frequency of relationship and the multiplexity of relationship. A peers’ relationship
is characterised by a hybrid trust, a joint generation of knowledge and a role equality.
This parity conception of a relationship leads to a new reading of the foundations of
audit quality that are auditor independence and competence. Audit quality appears as a
balance between its two determinants, competence and independence.
Despite recent discoveries of embezzlement and excessive risk taking in

subsidiary companies of several large French corporations, companies rarely
question the quality of the relationship they have with their auditors. This para-
doxical situation underlines the importance of an interrogation of the auditor’s
major role, that of reviewer of the financial statements of the company. Such
an interrogation is part of a larger debate on corporate governance (Charreaux,
1997) which includes the relationships between the firm and other stakeholders
such as clients, boards, banks. This thesis addresses a subset of only one relation-
ship between a firm and its stakeholders, i.e. the auditor of the firm.
Correspondence Address: Chrystelle Richard, Paris Dauphine University, CREFIGE, Place du Maré-
chal de Lattre de Tassigny, 75775 Paris Cedex 16, France. E-mail: c.richard@crefige.dauphine.fr
0963-8180 Print=1468-4497 Online=06=020153–27 # 2006 European Accounting Association

DOI: 10.1080/09638180500104832
Published by Routledge Journals, Taylor & Francis, on behalf of the EAA.
154 C. Richard
This research is relevant to those parties who are responsible for safeguarding
the quality of audits. Audit firms have proposed recommendations to audit quality
issues uncovered by financial scandals (Commission Européenne, 1996; Le
Portz, 1997). Supervisory institutions such as the Commission des Opérations
en Bourse (C.O.B. – French Securities and Exchange Commission) and the
Compagnie Nationale des Commissaires aux Comptes (C.N.C.C. – French
National Association of Registered Legal Auditors), have emphasised the need
for auditor independence as a fundamental determinant of audit quality.
These parties have yet to focus their efforts upon assessing the impact of the
auditor – client relationship upon audit quality.
This debate on audit quality can be held either by studying the audit report, or
by looking at the audit process. The audit report, the result of an audit, follows a
standard format, offering only a few possibilities of differentiation and character-
isation (Firth, 1993). Therefore, the value of studying the audit report as a deter-
minant of audit quality is limited. In this respect, the object of this article is the
study of the audit process, i.e. the process which makes it possible to lead to the
production of the audit report. From a methodological point of view, the interest
of such research is to further, in particular through the theory of economic soci-
ology, the concepts of embeddedness and trust. Indeed, these concepts have
neither a definition, nor a precise theoretical status and their impact on organis-
ations is still badly inconclusive. Operationalising the concepts of embeddedness
and trust raises a fundamental methodological issue.
However the audit process is in itself unobservable by third parties. How can
this problem be addressed? Some researchers (Power, 1992; Carpenter and
Dirsmith, 1993; Fisher, 1996) have used new audit technologies or audit
papers to study this issue in a social perspective. Their conclusions have
identified the significance of the interactions between the actors involved in
the audit process. In this sense, the perspective of the research is to propose a
relational reading of the audit process. In other words, it is a question of
apprehending the audit process by the study of relationships that exist between
different actors implied in the process. The process of production of an audit
report is analysed as the result of all the existing interactions between the firm
and the audit company. Hence this research focuses particularly on the relation-
ship between the financial director and the auditor as a major influence upon audit
quality.
In this respect, the research question is: what is the role of the relationship
between the financial director and his auditor in the audit process? How does
this relationship influence audit quality? This question breaks up into two sub-
parts. Firstly, it is a question of identifying the types of the economic and
social interactions between financial director and auditor. This enables us to inter-
pret the relationship in terms of dualism (professional/personal) and hybrid trust.
By underlining the way in which the economic interactions are inseparable from
the social context. This allows us to highlight the embeddedness of the audit
process. Consequently, this work is used to show the extent of the role that the
Why an Auditor can’t be Competent and Independent 155
relationship has on audit quality, making use of multiple economic and social
variables. In this sense, the theoretical interest of such a research can be asserted.
Beyond the two relationships identified by Williamson (1985), the market
relationship and the hierarchical relationship, this research contributes to the
development of a third relational field, that of the peers’ relationship. By
defining an audit as a relational process, i.e. social support of trust, a new type
of relationship emerges in the definition of corporate governance: the peers’
relationship.
This paper consists of three parts. First of all, the research question, which
establishes a relational vision of the audit process, is defined (1.). Then, the
understanding of the relationship between the financial director and the auditor
using an interpretative and qualitative approach is discussed (2.). Finally, the
interpretation results are given (3.).
1. The Research Question – For a Relational Vision of Auditing Process

Within the framework of a French legal audit, the auditor certifies that the annual
statements give a true and fair view in accordance with generally accepted
accounting principles. The research question of this work, such as it appears in
the conclusion of this section, is based on how the audit process is managed
(1.1.). The audit process is examined in this research based upon an objective
to reach high standards of audit quality (1.2.). Using the literature reviewed
and the exploratory study conducted, this research adopts a relational view of
the audit process to question the impact of competence – independence trade-
off upon audit quality (1.3.).
1.1. The Research Object: The Audit Process

The audit process is understood in two ways: economically and socially. Firstly,
it’s economically justified; secondly it’s analysed as a social mechanism.
Audit is commonly analysed in economic terms (Jensen and Meckling, 1976),
as an activity that reduces agency costs. These have been described as monitoring
costs borne by shareholders who must make sure that agents act in their interest
and carry out their policy, and bonding costs engaged by managers to guarantee
to their principals the execution of their obligations (Watts & Zimmerman, 1983).
The fundamental idea is that managers, who have trusted positions, must be
subject to the examination by a third party, i.e. an auditor (Chatfield, 1977).
In social terms, an audit then constitutes a societal response to the mistrust
between agents and principals. As a mechanism of social control, the audit
process is defined in social terms and constitutes a social mechanism of control.
The objective of this mechanism of social control is to give a credible image of
the company, with the aim of reproducing trust (Armstrong, 1991). Specialising
in the “marketing of trust” (Zucker, 1986), the auditor is the “guardian of trust”
(Shapiro, 1987). The audit can then be defined as a “process conceived to estimate
156 C. Richard
the credibility of the information contained in the financial statements of the

company”, “a process of judgement” (Humphrey, 1997, p. 4). Consequently, an
audit can be understood as a social mechanism that produces trust (Power,
1994). An audit is also a social mechanism of control, whose functioning
appears strongly complex. An audit goes far beyond a technical exercise of exam-
ining the preparation of financial statements. As a social mechanism of control, it
is the relationship between the audit team and the firm’s management that
characterises the audit process. In this respect, the audit process is a question of
judgement rather than a technical tool.
The economic and the social analyses thus complement each other. But the
understanding of the audit process can be conceived only through one objective,
the audit quality.
1.2. The Research Objective: The Audit Quality

In a classical article, De Angelo (1981, p. 186) defines audit quality as “the

market-assessed joint probability that a given auditor will both discover a
breach in the client’s accounting system and report the breach”. Obviously, the
first condition depends on the auditor’s technological capabilities whereas the
second depends on the auditor’s independence. In other words, “an audit report
is deemed of value if it results from both a technically competent and independent
audit process” (Citron and Taffler, 1992, p. 344). This work on audit quality and
its two components, the auditor’s independence and the auditor’s competence,
generates many research questions and constitutes the basis of this research.
The concept of auditor independence is analysed commonly in terms of inde-
pendence ‘in fact’ and independence ‘in appearance’. The first refers to the
mental process of the auditor, i.e. his attitude of impartiality and objectivity.
The second underlines the perception of this concept by users, i.e. the share-
holders, the investors and more generally the financial market (Mautz and
Sharaf, 1961; Wolnizer, 1987). Describing the concept of auditor independence
as an intangible mental quality makes the term relatively ambiguous, difficult to
interpret in the reality of the auditor work. Even if he is mentally independent,
auditor must thus give visible, explicit and accessible signs to the public. By
extending the concept of independence ‘in fact’ to that of independence ‘in
appearance’, auditors try to show that, considering the nature of their relation-
ships with their clients, the financial market can trust in their impartiality and
their capacity of judgement (Flint, 1988, pp. 63– 72). From this point of view,
the basic problem is to check if the auditor has a position in which he can
resist the pressures of managers in order not to compromise his independence.
Therefore all the efforts of the legislators, regulators and professional bodies
are directly related to the construction of a clear image of auditor independence
(Lee, 1993, p. 113).
With respect to competence, the definitions presented in the audit literature
underline its technical aspect, related to knowledge and individual know-how
rather than the personal aspects. Thus, according to Flint (1988, p. 48), a qualified
auditor “must have a sufficient knowledge, formation, qualification and
experience to conclude a financial audit”. However, surprisingly, the operational
definition of auditor competence dominates the evaluation of audit quality. For
example, according to Behn et al. (1997), the most important aspect is that the
auditor is pro-actively involved in the business of the company, provides a
service that goes beyond the simple audit of the accounts and gives way to
consulting. This last aspect would constitute the true determinant of the added
value of an audit.
Finally, it should be noted that, in the traditional literature on audit quality,
competence and independence are supposed to be two separate characteristics
of an auditor. This ‘separative’ description of the auditor’s behaviour is devel-
oped in the main texts on auditing. For example, Watts and Zimmerman
(1986, p. 314) suppose that the probability an auditor reports a breach depends
on two separated probabilities: the auditor discovers the breach (competence)

and the auditor reports the discovered breach (independence). Schandl (1978,
p. 192) analyses the auditor’s independence as a necessary condition to the com-
petence. In the same way, Boritz (1992, p. 22) suggests that independence, more
than competence, is the essence of auditing activity. Indeed, by distinguishing the
competent from the very competent individual, Boritz (1992) wonders if an
auditor really needs to be an expert in order to conduct an audit effectively.
However, Lee and Stone (1995, p. 171) think that the auditor can’t choose to
be independent unless he is competent. In other words, they analyse competence
as a prior condition to independence. According to Lee and Stone (1995), it is
proposed that the first and basic conflict is the relationship between auditor
competence and independence. Thus, these authors think that, ceteris paribus,
the more it is probable that the auditor is competent, the more it is probable
that the auditor is independent. Alternatively, the more it is probable that the
auditor is incompetent, the more it is probable that the auditor is dependent.
Any problems relating to quality then suppose to think jointly on these two
elements and on their link.
A way to examine the impact of the audit process upon audit quality is to adopt
a relational perspective.
1.3. The Research Perspective: A Relational Approach

The audit process generally breaks up into four relatively standardised steps.
However, as each step can be formulated like a question of judgement, audit
appears like a sociological process. This sociological process, and its quality,
then are basically determined by the relationships existing between the implied
actors.
In practice, conducting an audit is a succession of several well-defined
steps (Woodrow, 1997). The audit process is divided in general into four steps:
audit strategy planning, evaluation of the internal system of control, direct
158 C. Richard
control of accounts, concluding work. The objective of the first step is to set up
the direction of the audit. It is based on an understanding by the auditor of the
client activity. This step determines all the procedures that will be conducted
thereafter. It is led by the partner and based on the information obtained from
the management of the firm, such as the various experiences of the previous
years or the accounting projects of the company. The development of the strat-
egy is thus a critical condition of a quality audit. The importance of the first step
in the audit process was clearly stressed by the exploratory results of the
research. Consisting of interviews relating to the audit process, this investigation
not only supported the critical role played by the audit orientation, but it also
strongly underlined the significance of the relationship between two actors,
the financial director and the auditor. The audit process then seemed basically
relational.
As the partner of an audit company stated, “an auditor is a controller who must
provide a service. There is also a ‘client’ attitude. The partner will take time,
during a lunch, to discuss with his client, the quality of the relationship. He
would say: ‘can we discuss quietly our relationship? How do you find it? What
else can I do?’, etc.”. By playing a role not only of controller but also of an
adviser, the auditor embeds his relationship with the financial director of the
audited company in the audit process. A group accounts director explained the
following: “We want a personalised and responsible auditor because, when we
have a problem, it is with him we talk. All happens in what we say to him, in
what we make with him. . . Finally, a lot of things happen with him. Finally, it
is important to have somebody with whom we have a wave of fellow feeling”.
Consequently, we must go beyond the traditional analysis of audit based on
agency theory and consider the relationship between the two key actors of the
audit process, the partner of the audit company and the financial director of the
audited firm. Thus, according to Power (1995), it seems that research in audit
requires going beyond the analysis of the audit processes and practices as a
purely technical phenomenon and that there is need for an approach based on
the “sociology of audit technique”. In this respect, audit can be analysed as a
“social and institutional practice, one that is intrinsic to, and constitutive of
social relations, rather than derivative or secondary” (Miller, 1994, p. 1). The
relationship between the financial director and the auditor, whose weight is
determining in the audit process, finds also its importance in the audit quality.
As a partner explains: “You know, relationship is the master key, with which
all is discussed, all is understood. A purely mechanical audit is useful for
nothing. A good audit requires good relationships”.
This research proposes that perhaps the relationship between the audited firm
and the audit company endangers auditor independence, and thus audit quality,
without however deteriorating its public image. In this respect, it is a question
of understanding in a clearer way the relationship between the financial director
and the auditor, i.e. its role in the audit process, in order to better explain what
determines auditor independence and auditor competence, and consequently
audit quality. To meet this ‘understanding’ objective, this research has adopted an
interpretative position.
2. The Method – The Analysis of the Relationship Between the Finance

Director and the Auditor: A Qualitative and Interpretative Approach
The objective of this method is to provide an interpretation of the role of the
relationship between the financial director and the auditor in the audit process;
this interpretation makes it possible to propose an explanation of its influence
on the audit quality. Therefore it is a question of understanding the interactions
game between the financial director and the auditor, in order to develop a subjec-
tively shared understanding that is the source of the “social construction of
reality” (Berger and Luckmann, 1991/1966). This interpretation is conducted
with the method developed by Glaser and Strauss (1967), the “grounded
theory”. In this respect, the data collection, based on interviews, was the object
of a qualitative and iterative approach (2.1.). These interviews were then inter-
preted on the basis of several theories considered not as exclusive but as comp-
lementary (2.2.)
2.1. The Data Collection: A Qualitative and Iterative Approach

The analysis bases consisted of the relationship between the financial director and
the auditor within the framework of the companies listed on the CAC 40 (Stock
market index that gathers the 40 most important French firms in terms of capita-
lisation). The data collection method was the interview.
Regarding data collection, the data set was based on financial audits. Such
audits are considered as the base of all kinds of audit and consulting services
and are a good representation of all different types of audit activity. The data
set consists of the companies listed on the CAC 40. The objective is to study
comprehensively the relationship between the audited firm and the auditor.
The relationship is logically considered as the analysis object of this research,
i.e. the specific relationship between the financial director and his auditor con-
stituting the analysis unit.
The empirical study is based on interviews. Indeed, the investigation by inter-
views was selected as method of data production because it allows an understand-
ing approach (Weber, 1965/1922). The empirical approach had four steps. The
first step was an exploratory study, the objective being to explore the general
themes and to prepare the research question. A series of non-structured
interviews was conducted with auditors, financial directors and directors (the
interview guide appears in appendix 1). The second step aimed to analyse the
research question and consisted of interviewing, in a semi-structured manner,
the key actors of three firm – auditors relationships. The objective was to try
to understand the various aspects of this relational network (the interview
guide is in appendix 2). The third step supplemented the second phase by
160 C. Richard
focusing on the ‘particular’ relationship between the financial director of the

company and the partner of the audit company. The idea was to try to finely
characterise this inter-individual relationship. Directive interviews were led
with financial director – auditor dyads (see interview guide of in appendix 3).
At the end, ‘free’ interviews were conducted with some previously questioned
actors and other professionals considered as experts. This fourth step aimed to
evaluate the internal acceptance of the proposed construct. In conclusion, sixty
interviews were led with sixteen firms listed to the CAC 40, eight audit compa-
nies, the C.O.B., the C.N.C.C. or the M.E.D.E.F. (National Association of French
listed firms) (see appendix 4). A content analysis was conducted for the explora-
tory study, the study of the three relationships and the study of dyads. It was
managed in three steps: an analysis interview by interview, a thematic analysis
in order to build a thematic dictionary, and finally an analysis by oppositions.
However the interpretative step not only requires to make emerge a coherent
organisation of the speeches of the actors in situation but also to underline the
empirical concepts appearing with a relevant theoretical framework. In this
case, two theoretical fields seemed necessary for a better interpretation of these
interviews: agency theory and economic sociology. It should be stressed that
this step allows the use of several theoretical frameworks, the criterion being
the extent of their explanatory capacity (Wacheux, 1996).
2.2. An Interpretation Based on Two Theories

The theoretical choices are the cornerstone of the method used in this research.
They give sense to the collected data, allow building a conceptual framework
and offer the required interpretation of the role of the relationship between the
financial director and his auditor in the audit process and its influence on the
audit quality. These choices, the positive agency theory and the economic soci-
ology, were considered the most relevant to addressing the research question. In a
handbook dedicated to the economic sociology, Williamson (1994, p. 85) admits
the interest of this double approach, telling that “transaction cost economics and
embeddedness reasoning are evidently complementary in many respects”. It is
the challenge of the following developments to underline the ‘added value’ of
a double theoretical perspective.
One of the first striking characteristics of the conducted interviews is that
almost all of the people questioned indicated, from the very start of their inter-
view, trust is the most important characteristic of the relationship between the
auditee and the auditor. They quoted on several occasions this idea. Trust
seems the key element of the audit relationship. It can be defined as “the will-
ingness to be vulnerable” (Mayer et al., 1995), “a psychological state relying on
the intention to accept the vulnerability based on positive expectations of the
intentions or the behaviour of the other” (Rousseau et al., 1998). Trust
between the manager and the auditor emerges from a relationship which can
be described as a professional and personal relationship (2.2.1.). The overlap
of these two aspects is analysed like the embeddedness of the audit process
(2.2.2.).
2.2.1. Professional relationship and personal relationship

The relationship between the managers’ team and the auditors’ team takes two
forms: a professional and personal relationship. An auditor introduces perfectly:
“It is a relationship that is extremely professional, but it does not exclude
personal relationships. What characterises it basically, is that it is embedded
in professional standards. When the two partners are very professional, then
the relationship is professional. However this does not stop it becoming personal.
The personal link comes from the fact that we work for a long time together and
that we came to know each other well, to work well together. We can then manage
very well all the accounting problems of this Group. So the relationships have
become a little more than professional”. The double approach of the relationship
between the financial manager and the auditor leads to enrich the pure economic
analysis and to complete it with the sociological aspects of the relationship. In
this sense, Williamson (1994) exposes clearly the abuse of calculativeness and
underlines the importance of the role of atmosphere, that is to say the relevance
of social and informal exchanges in every economic transaction.
The professional relationship is described by the interviewees to be like an
economic exchange (Williamson, 1994), framed by a lot of professional stan-
dards whose object is to create barriers preventing the development of informal
engagements during the formal audit process (Ring and Van De Ven, 1989). This
economic exchange allows the emergence of a calculated and standardised trust,
which can be named ‘professional’. In this sense a financial director underlines:
“We must work with audit companies that are more and more professional
because it is difficult to supervise, in a group such as ours, the quality of all
theis teams. They must be very structured so that we trust in their teams. All
must be extremely structured. We cannot allow ourselves to give the least sign
of weakness, to be a little vague with the financial market and not to gain its
trust”. Trust thus seems a deliberated calculation (Williamson, 1993), relying
on an explicit and detailed commitment letter and detailed and precise
professional standards. In this sense, professional trust can be defined as
“the probability that this one carries out an action that is beneficial or at least
non-prejudicial is rather strong according to us to consider that we can engage
in a form of cooperation with him” (Gambetta, 1988, p. 217).
From one financial director, it is clear that “it cannot be a simple friendly
relationship which determines the choice of an audit company; the relationship
with the auditor is above all a professional relationship. But, in order that there is
transparency between the company and its auditors, it is necessary that there is
great trust in the relationship. It is thus necessary that there are also friendly
links”. In other words, the professional relationship must be supplemented by a
personal relationship so that the audit process is based on a “great” trust. The per-
sonal relationship is defined as a social exchange, implying in particular
162 C. Richard
obligations that are not specified a priori (Blau, 1964). Its duration, the frequency
of the contacts, the reciprocal services provided by the partners, the emotional
intensity lived at certain times, create a strong interpersonal link (Granovetter,
1973). The director of a subsidiary company characterises his relationship with
his auditor in this sense: “Naturally, when we perceive a problem, we go
towards the interlocutor with whom we speak the most easily, our auditor. Never-
theless, these personal relationships have much importance. They are very comp-
lementary to purely technical relationship, and I would say that they are essential
if we want a good relationship”. Personal trust is defined then as “a belief of a
person in the integrity of another person” (Larzelere & Huston, 1980, p. 595)
and “exists insofar as a person believes that another person is benevolent and
honest” (ibid, p. 596). In other words, repeated interactions create the formation
of habits, by developing empathy or friendship links (Granovetter, 1985).
Just like the relationship that binds them, the trust between the managers and their
auditors, has two dimensions, i.e. professional and personal relationships. More
precisely, whereas the professional relationship constitutes the support of a ‘pro-
fessional’ trust, the personal relationship is the base of a ‘personal’ trust. “The
upshot is that personal/trust relations and commercial/calculative risk relations
differ in kind” (Williamson, 1994, p. 97). Then the personal links embed the
professional relationship, this embeddedness giving way to a hybrid trust.
2.2.2. Towards an understanding of the professional/personal overlap

The two relational forms are inextricably dependent. The professional relation-
ship is essential to conducting the audit and the personal links support and sup-
plement the professional link. This overlap is interpreted with the embeddedness
of the economic exchange (Polanyi, 1944, 1957; Granovetter, 1985, 1992),
explaining the emergence of a trust described as hybrid.
The analysis of the audit relationship underlines the limits of the economic
theory, without however contradicting the contributions of it. In other words,
the economic action does not proceed in a social vacuum, but reciprocally, it
is not the mechanical translation of the social structure on the individual
decisions. Thus, as he works almost daily on the audit of the accounts of the
company, the auditor meets repeatedly the manager. He discusses regularly
with him and acquires a familiarity of the company and his interlocutor. In this
respect, he supports and supplements his professional relationship by more
informal personal links. As an accounting director explains it, “we also use
additional services of D. It is true that we use. . . Yes, it is not very well, but
we elect D. for heaps of other missions that are not directly related to the
audit. Thus they systematically help us in the case of acquisitions. Also sometimes
they help us in recruitment. They have a small recruitment service, when we look
for somebody for a financial position for example. . . It also happened that they
sold subcontracting services to us. They have a department that sells subcontract-
ing services for consolidation. It sometimes happens to us to ask for assistance, to
rent a person, if I can say it, when we have a big problem here, when a person is
sick”. “The networks of social relationships penetrate in an irregular way and

with different degrees the various sectors of the economic life” (Granovetter,
1985, p. 491)
These multiple, economic and social mechanisms are reinforced mutually and
then form the basics of a hybrid trust. The thesis advanced in this research is that
the trust and the search of personal interest play jointly a role. Professional
relationship and personal relationship, search of personal interest and develop-
ment of trust, are relevant dimensions of the audit process. Thus, whereas
Williamson (1993) reserves the concept of personal trust to the non-transactional
relationships, that they are friendly or family, such a radical separation between
impersonal economic relationships and personal social relationships does not
seem to reflect the reality of the audit relationship. The trust, which can be
called hybrid, is the result of personal relationships that emerge from economic
transactions (Dore, 1983; Granovetter, 1985; Macauley, 1963). The continuous
and repeated interactions between the two partners allow its progressive develop-
ment (Good, 1988). A general manager of a subsidiary company thus character-
ises his relationships with his auditors: “They are open, pro-active and very
trustful relationships. In other words, we have sufficient trust in our auditors,
in their capacities and their willingness to help us”. This hybrid trust can then
be defined as “the belief that an agent has about another, on the basis of his pre-
vious experience, as for the way in which this individual reacts to unforeseen
events that give him the possibility of an opportunist behaviour” (Brousseau
et al., 1997, p. 404, translation). The individual trusts not only in the ability of
his partner to fulfil his obligations but also in the willingness of the partner not
to act in an opportunist way. In other words, the auditor tries to establish a trust
relationship with his personal relationships, the speed and the performance
of the provided services and the exchange of information.
Thus, these two concepts that are hybrid trust and the relationship dualism
(professional/personal) initially emerged from the analysis of the speeches.
They then were the subject of a theoretical reflection which seems to us suitable,
through on the one hand of agency theory, on the other hand economic sociology.
This interpretation induces thereafter a proposal for the definition and character-
isation of the relationship, as a peers’ relationship.
3. The Interpretation Results – A Peers’ Relationship: A Determinant

of Audit Quality
The two key notions of the interpretative process, the dualism of the relationship
and hybrid trust, guide us towards a redefinition of the relationship between the
financial director and the auditor, as a peers’ relationship. Indeed, in the daily
relationship, the financial director and his auditor act like similar people in
terms of their position and their social condition. With time, the contractual
relationship gives way to an interpersonal relationship in which the actors are dis-
tinct but equal, a relationship characterised by a reciprocity in the exchange and
164 C. Richard
an equality of the contributions. A more detailed understanding of this relation-

ship thus leads to the concept of peers’ relationship, a concept which needs to be
clearly defined and characterised. This concept leads to a second reading of the
basis of audit quality, allowing a new understanding of the link between
auditor independence and auditor competence.
The presentation of the results initially examines the relationship between
financial director and auditor in terms of parity (3.1.). Subsequently, a suggested
interpretation of the influence of this peers’ relationship on audit quality is
proposed (3.2.).
3.1. The Analysis of the Peers’ Relationship

The peers’ relationship will be investigated on a static (3.1.1.) and a dynamic
level (3.1.2.), considering that the research is only focusing on senior level
interaction.
3.1.1. A static vision of peers’ relationship: its emergence conditions

The relationship between two peers emerges from its social structure, i.e. stan-
dards shared by the two actors, the degree of frequency of the relationship and
its multiplexity.
The analysis of the relationship between the financial director and the auditor
makes it possible to underline the first aspect of the social structure, i.e. the
sharing of professional and cultural standards. Indeed, because of the similarity
between their organisations, a similar professional qualification and/or an iden-
tical academic training, financial directors and partners share common pro-
fessional and personal principles of what must be. These social standards, by
the community of the shared values that they imply, have a major impact in
the conclusion of a transaction or the continuity of a relationship (Dore, 1983;
Macauley, 1963; Ouchi, 1980). A financial director confirmed this: “R. has a
very constraining written code; they are the ‘Seminal laws’ of R. It is necessary
to have certainty that the context is well understood by the auditor. Either he
understands, or he steps down. It is necessary that he understands that he is
not alone, that he operates in an environment. Therefore he must, in addition
to his personal contacts, understand the culture of the Group. Anyway there
are people who could not live with us. We need to be sure that our auditors
belong to the mould, otherwise we are putting ourselves at risk. Indeed, in our
activity, we take many risks. The auditors must thus manage the same way,
with the same philosophy”. This normative isomorphism (DiMaggio and
Powell, 1983), which imports a sense of equality, seems to be a necessary
condition allowing the emergence of a peers’ relationship.
A second aspect of the social structure can be seen in the frequency of the con-
tacts between the financial director and the auditor. It can be the first character-
isation of the strength of the relationship between the financial director and the
auditor, the “combination of time, emotional intensity, intimacy and reciprocal
services” (Granovetter, 1973, p. 1361). The two partners see themselves almost
daily, which makes it possible to qualify their relationship as continuous. An
auditor underlines his availability and the frequency of his meetings with the
financial director: “the meetings that are not envisaged or planned very little
time in advance are extremely frequent. As soon as there is a particular subject
that arises, we phone each other and we go immediately to the firm. It frequently
happens to me to receive a phone call at 9 o’clock and to be at the company at 10
o’clock”. And he justifies his daily presence by the importance that this group con-
stitutes in the turnover of the audit company: “V. is an important client for us. On
all our large accounts, the presence is almost daily. Because these great groups
have delicate questions which arise everyday. And we must answer them”. Thus
the audit itself is not simply an a posteriori control of some financial statements,
but takes more the form of a shared and continuous control of financial statements
of the firm. “Today, the audit in a great group is a matter of almost daily report-
ing, so as to work with them on our opinion, in order that they can progressively
modify their forecasts and the constitution of their accounts to eventually make
sure that our opinion is favourable”, underlines an auditor. The frequency of
the relationship, considering the reciprocity of the exchange that it engages,
seems to be a condition of emergence of a peers’ relationship.
Finally, the social structure can be defined by the multiplexity of the relation-
ship, i.e. the number of links of different contents between two actors. Thus, two
actors can not only be bound by a close physical proximity or friendship, but also
with respect to business connections also. The relationship between the financial
director and the auditor was previously analysed in terms of professional and
personal relationship. A financial director stresses the importance of this
second link which constitutes the personal relationship: “If our auditor were
unpleasant, frankly, that could be an issue. He must be well accepted within
the organisation. . . In order to launch his tentacles and to collect the information
that supplements the formal files that his staff collects. This information, it is to
understand how the managers function intellectually, which are the principles of
action, the ethical codes, the practices and the speeches, the coherence or the
inconsistency of both, and then the intentions which we can have – strategic
plans, new business, those companies which deserve to be disinvested – . . .
They must be able to anticipate even what we do not say to them on the
coming disinvestments. . . They must feel all that. There are many ‘judgemental’,
‘appreciative’ aspects. It needs some sensitivity. It is not completely mechanical.
The personal relationships are very important between the financial director and
the partner”. But, even if it is obvious, the personal relationship takes varied
forms, from a real link of friendship to, more generally friendly, but restricted
contacts. The development of a peers’ relationship thus seems to be facilitated
when the actors are bound by another relationship than a strictly commercial one.
The social structure of the relationship between the financial director of the
company and the partner of the audit company is defined by three major
variables: normative isomorphism, frequency, multiplexity. A relational
166 C. Richard
phenomenon, defined as the peers’ relationship, has strong probabilities of emer-

ging. Due to the dynamics of embeddedness, this concept of parity develops and
appreciably influences the audit process.
3.1.2. A dynamic vision of peers’ relationship: its characteristics

The objective is to give a first characterisation of a peers’ relationship. This analy-
sis is based on the dynamics of the embeddedness of the relationship between the
two actors. The important characteristics of a peer’s relationship include the level
of trust, knowledge sharing, and the nature of the respective roles.
The relationship between the peers, in this case between the financial director
and the auditor, is initially characterised by a hybrid trust. Its definition takes into
account its economic and social aspects. But this trust evolves with time, from a
trust based on reputation to a trust based on empathy. Thus, initially, when the
financial director makes the choice of an auditor, the brand name is a significant
factor in the choice of audit firm. This trust constitutes an explicit recognition,
considering the phenomenon of reputation, of a shared morality. It takes an
instantaneous form – also qualified as “swift trust” (Meyerson, Weick and
Kramer, 1996) –, initialising the relationship between the two peers. The com-
ments from a group accounts director illustrates this point: “It is not because
they will write Mr. X, auditor, Y postgraduate, patented and recognised by the
government that we must trust. It is insufficient. The reputation of an audit
company is a presumption that we can trust him. It is necessary to trust the
firm from the start, therefore we rely on its reputation. But, after subsequent
dealings, it is not sufficient any more”.
Then, trust evolves and is based on a shared experience. Indeed, as the relation-
ship develops, the two actors learn how to work together, face urgencies or ques-
tions that were not envisaged, and understand each other better professionally.
Thus, the relationship, based on a regular and continuous communication,
gives way to an informational trust – which can be also described as “compe-
tence trust” (Sako, 1991, 1992) – . “At the moment, I prepared the development
policy of the Group in Asia. My strategy is dependent upon figures in Asia.
However, not many people here speak Korean and French. Therefore you must
trust the accounting control systems, in particular the auditor. In short, if you
don’t trust your auditors, you have doubts about your own accounts”, explains
a financial director.
Finally, beyond an informational trust, a trust based on some identification, an
empathic trust, can develop. Indeed, the auditor can internalise the preferences of
the financial director and identify with him. A long common history, a close
proximity, sometimes religious, cultural or social common values, and the
sharing of the strategy and goals of the company, induce a sense of identity.
This third stage is not inevitably reached and can be materialised only at some
times of the relationship, in particular when adversity requires two peers to
show solidarity. An internal audit director testified: “Sometimes, they fought at
our sides. Because you know that the audit companies themselves are controlled
by their peers. It occurred that the audit conducted by S. on V. was reviewed by

CENA, the independent audit standards examiner in France. In order to defend
the audit, the auditors have, in fact, used arguments that we built together, when
we, we defend our cause! They live with us! The decisions that we ratify, they
ratify them too! At the end, we don’t live on our own side”. This development
of hybrid trust allows a joint production of knowledge. In this sense, it reduces
the information asymmetry between the two peers.
An auditor explained: “There is a work to do and an expertise of this Group to
have. All parties involved in the financial aspects of a company must be compe-
tent. These people who have a financial task (the lawyers, the fiscalists, the com-
puter scientists, . . .), influence financial communication, hence they all work
together to control what this Group expresses on the financial basis. It is truly
shared work that the company’s financial management could not progress
without the auditors, and the auditors could not contribute without the financial
management”. This joint financial control of the company is analysed on the one
hand by the sharing of accounting knowledge, which is internal or external of the
company, and on the other hand by the sharing of accounting work. The source of
this joint thinking is permanent communication between the two peers. This
results in faster and effective communication of explicit knowledge and a more
profitable exchange of the tacit knowledge. The explicit knowledge is constituted
by all the accounting data of subsidiary companies that facilitates the construc-
tion of the group accounts, and also the accounting principles that are used at
the corporate centre and applied in all the subsidiary companies. The embedded-
ness of the relationship between the financial director and the auditor allows the
explicit knowledge to travel more quickly. A director said: “the rule of the game
is clear. As soon as they find errors (because all of them do it), they tell us
immediately. We discuss it and we correct it when we can [. . .] For example,
they were on mission in Spain last June. They found that the calculation of the
acquisition goodwill of a Spanish company was badly made. They showed me
their own calculations. I would not have had this information they had gone to
Paris. I phoned the auditors in Spain and I understood that P. was right. We
had been mistaken in the way of calculating the net value taken into account
for the goodwill. We corrected it immediately”. In addition, the permanence of
the communication allows for the exchange of more confidential and tacit infor-
mation. Tacit knowledge includes information and knowledge on the history of
the company, its trade, its culture, its strategy or its projects but also the account-
ing options that are possible to it. It is very difficult to translate into speech (Reix,
1995) and to communicate through the links of the market. However, when the
interactions are strong and continuous, the tacit knowledge of the managers’
team becomes that of the auditors’ team, and reciprocally. This transfer corre-
sponds to the socialization process (Reix, 1995). Thus, as they interact repeat-
edly, the auditor and the financial director get to know each other well, and to
trust each other little by little. Hence they share information and knowledge
that is increasingly rich, complex and detailed (Granovetter, 1985). A group
168 C. Richard
accounts director explained: “There is an international accounting standard that

will require, as from the next year, all groups to depreciate their intangible fixed
assets (market shares, etc.). In content and philosophy, when IASC says: ‘we need
a systematic depreciation of each asset’, it makes sense! And in this respect, I
understand it. All the experts at the French Stock Exchange are in favour of
the systematic depreciation of the fixed assets whatever they are: tangible, intan-
gible, etc. When we look at this problem, seen from our company, from our
experience, from our market shares, it is obvious that our market shares, from
their structure, from their constitution, do not devalue over time. Thus, we are
completely opposed to the depreciation of market shares. I affirm to you, that
our auditors understand it well. They have always known how I calculate my
market shares, how I gather information on them, how I follow them through
the time, how I find what I say! If I discuss it with another audit firm, what
type of information will they bring me? They do not know my business. They
will say: ‘yes, it is more reasonable to depreciate because, like that, everyone
is comparable. . .’. They will say to me things that are not stupid, but that are
too general. This type of advice does not interest me”.
Finally the embeddedness of the relationship, its duration and the trust which
results from this, are likely to reinforce the effectiveness of the audit, by a
common learning of knowledge: a technological learning (i.e. an accumulation
process of knowledge and technological competencies); a learning of the
partner, (i.e. a progressive knowledge of his personality, his behaviour, and the
communication and collaboration with him); a learning concerning the relation-
ship between the two peers (in particular the means of defusing conflicts). “This
common work includes knowledge of the company, of its risks, of its market risks,
of its accounting methods. That means a constant accumulation of specific
company insights over time”, concludes an auditor.
This first definition and characterisation of a peers’ relationship can be under-
stood by analysing the roles of the financial director and the auditor. For example,
in the audit of the accounts of the subsidiary companies, the financial director and
the auditor play the same role: that of an evaluator, a controller of the accounting
decisions of the subsidiary company. However, when an accounting decision
is discussed on the level of the holding, a decision that has general strategic
implications, the two roles become quite distinct: the financial director
decides, the auditor controls. So the auditor is at the same time an external con-
troller and internal prescriber, being located at the same time outside and inside
the company. An auditor thus explains very judiciously this duality: “an auditor
is both, insider and outsider. The insider side should be only there to be sure that
the role of outsider is held perfectly. Because you cannot imagine keeping a client
like L. if there are problems outside: a shareholder who asks questions, people
that criticise the accounts of L., the Stock Exchange Authority. that raises
questions. I believe that we use our insider side for playing the role of outsider
perfectly well. If we do not have the role of insider, it is complicated to play
the role of outsider well”.
Hence, the link between the financial director and the audit partner can be
defined as a peers’ relationship, supported by a strong social structure, a
mechanism of trust, a joint production of accounting knowledge, and an equality
of roles. A parity governance of the audit process has an influence on the audit
quality.
3.2. The Influence of the Peers’ Relationship on Audit Quality

The influence of the peers’ relationship on the audit quality provides a new
insight into the relationship between the independence of the auditor (3.2.1.),
his competence (3.2.2.) and the audit quality (3.2.3.).
3.2.1. Peers’ relationship and independence

“I think that you heard about the word independence, often. . . I think that we try
to respect it but that does not stop in everyday life. . .”. These hesitations of an
accounting director translate extremely well the position of the managers and
the auditors regarding the auditor independence: an essential element of the
audit, it can only be respected and publicly defended, while being of great ambi-
guity in daily reality. Consequently the question should follow: Can a peers’
relationship proceed with complete independence? Such as it is commonly
tackled, independence is based on the avoidance of a conflict of interest. But,
such as it is identified by its protagonists, independence seems to be formulated
around the question of the reduction of information asymmetry. “The problem is
that, if you do not have mutual trust, it is more complicated to have effective
independence because you do not know everything that is relevant. Hence, it is
difficult to pre-empt problems. Independence without being well-informed,
cannot function”, affirmed one auditor. It seems that a peers’ relationship could
constitute a threat to independence by the supposed sharing of roles and of
interests. But it would also allow for a better management by the auditor of his
independence by reducing information asymmetry. Independence seems a
point of balance between an ideal independence and a real dependence, a
negotiated and realistic compromise between the financial director and the
auditor.
Ceteris paribus, auditor independence depends then on the degree of parity of
the relationship which is maintained with the client. If auditor independence is
defined as an independent mental attitude enabling him to conduct his mission
with integrity and objectivity, but also as the absence of any real link that
could constitute an obstacle with this integrity and objectivity, then the degree
of independence is a decreasing function of the degree of parity of the relation-
ship, ceteris paribus.
However the problems of information asymmetry and its possible reduction
are also central when the question of the auditor competence is addressed. The
peers’ relationship, by reducing information asymmetry, gives an even more
significant weight to the concept of competence.
170 C. Richard
3.2.2. Peers’ relationship and competence

The subsequent commentary underlines two fundamental aspects of auditor
competence: technical competence (“experience”, “professional”, “to under-
stand the working methods” and “the characteristics of the Group”) and rela-
tional competence (“to know what is important for the managers”, “which is
the relationship to be instituted ”). These two aspects rely on the same basis:
ongoing learning and a long term relationship. A financial director confirmed:
“By knowing our projects, they can help us on the traditional level of the audit
of the accounts, to draw our attention to such or such problem. They can also
help us more effectively to treat the audit of an acquisition, because they know
what we expect, with which accounting sauce the entity will be eaten later.
They know our industry, they thus know the questions to be asked in our type
of industry during an acquisition. In this respect, they are technically very qua-
lified, that, it is clear, because they know a lot about the characteristics of the
Group. But they are also through the listening to our needs, very conscious of
our expectations and very close to our culture. They are in the same mould
and it is important because they understand our ‘way of seeing’”.
However, the auditor must keep an external view because this constitutes his
added value. On the one hand, the auditor should not be ‘all at sea’ under flows of
information from the company. Indeed, his technical competence takes its source
not only in the detailed knowledge of the audited group but also in the external
and distant position that he has compared to this entity. In addition, the process of
thought and reflection of the auditor should not become too similar to those of the
financial director. Indeed, too much familiarity not only would make the control
of the accounts more difficult but would also stop the innovative ideas. Therefore
too much experience with the company in question combined with an explicit
empathy would make the auditor less competent. A financial director commen-
tary illustrates this well: “Often, we ask them for ideas. We need their technical
skills, their creativity, their intimate knowledge of our business but also their
experience outside the company in the same kind of situations, to know which
solution can be applied ”.
Ceteris paribus, auditor competence depends on the degree of parity of the
relationship which the auditor maintains with the client. Indeed, when the finan-
cial director and the auditor consider themselves little by little as peers, the infor-
mation asymmetry is reduced and the auditor becomes increasingly technically
and relationally competent. However, too much parity, drifting towards a logic
of identification, harms the concept of auditor competence. The auditor would
no longer play his role of controller and external adviser and instead adopt the
position of an ‘insider’.
3.2.3. Peers’ relationship and audit quality

This initial ‘separative’ reading has the merit of underlining the positive and
negative effects of the development of a relationship based on trust, the
sharing of explicit and tacit accounting knowledge, the determinants of audit
quality. Subsequently, it would be interesting to conduct a ‘joint’ reading of the

effects of a peers’ relationship on audit quality. This analysis is not claimed
exhaustive, nor sufficient. It aims simply to provide initial proposals for reflection
regarding the interpretation identified by this research. A first reading can be
focused on the concept of multiplexity of the peers’ relationship and be formu-
lated around the professional/personal duality. A second reading will then
clarify the optimal balance between the determinants of audit quality, namely
independence and competence.
Initially, it appears clear that the auditor must hold two roles: that of public
agent of the investment community and that of private and confidential agent
of the managers’ team. This double role is similar to the double relationship
between the financial director and the auditor. The professional relationship,
i.e. support of a professional trust, plays the role of the defender of auditor
independence; the personal relationship, i.e. support of a personal trust, is an
important determinant of auditor competence. The balance between these two

relational types determines audit quality. When the personal relationship devel-
ops little by little, jointly with the professional relationship, the auditor becomes
increasingly competent. However, when the personal relationship becomes too
close, to the detriment of the professional relationship, the auditor becomes
less independent. Consequently, it is only when the relationship is of a pro-
fessional and personal quality, that the audit has an optimum level of competence
and independence.
The balance between professional relationship and personal relationship (too
close/too distant to the client or the auditor) can result in a balance between com-
petence and independence. Indeed, contrary to what is advanced in some research
on audit quality, the two dimensions, independence and competence, are intrin-
sically dependent because they are subjected to the influence of common factors.
Therefore ceteris paribus, the global optimum, in other words maximum quality,
is not the sum of partial optima, in other words a total independence and a total
competence, but are the result of a balance between two optima.
Concluded one auditor: “One can say to you: ‘yes, the auditors are there for so
many years, now they know the accounts so well perhaps they are too close to
them’. Me, I will not hide from you that at L., I have control, I know the accounts
well. But that helps me to anticipate all the points. On another side, I think that
the company knows what it is doing. You see what I want to say? It is a little
ambiguous. A good balance should be found. It is necessary to find good
balance between control of the company and the non-interference with manage-
ment. It is true that we have known them for ten years, we know well the group, we
know the financial director, we know the place. It is true that we help them. We
audit them and we help them. It also makes it possible to deal with their problems
and to proactively assist them. Finally, this balance is a problem common to the
company and to the auditor”. Hence, achieving high levels of audit quality is a
search for a balance between auditor independence and auditor competence,
between the professional relationship and the personal relationship of two peers.
172 C. Richard
Conclusion
From a practical point of view, we saw that the auditors are in search of a difficult
balance between independence and competence. According to the interviewees,
this balance is generally reached in the majority of the great French groups, in
particular by the management of a parity relationship. The normative recommen-
dations are not then to give more responsibilities to the auditor, but to redefine the
role of an auditor within the company. On a methodological level, the under-
standing of this relationship between the financial director and the auditor consti-
tuted the heart of this research. The contribution of such a method was to be able
to confront the comments, and thus perceptions, of the financial director and his
auditor, whether they were divergent, convergent or complementary. The theor-
etical contributions are of three types. First of all, research in audit is an emergent
field in France. Secondly, the current debates on the concept of trust clarified this
research in auditing, by conferring a transversal reflection to it. Finally, this
research opened a reflection on the definition and the characterisation of the

peers’ relationship. Hence, while positioning on an individual level, the peers’
relationship appears as a third relational field, beyond the fields identified by
Williamson, i.e. the market and hierarchy relationships. More broadly, this
concept can certainly find its place in the current debates on corporate governance.
But this research also presents some limits. From a practical point of view, the
audit quality was tackled in this research only by the lens of an inter-individual
relationship. So we must not forget that other levels of analysis can explain audit
quality, such as the organisational level of the audit company or the institutional
level of the C.N.C.C. On a methodological level, the interpretation would have
taken more sense if a direct observation could have been led jointly to the com-
mentary collection. This approach raises the question of the obvious relevance of
a case study. Finally, on its theoretical aspects, the research examined only one
relationship, certainly considered as decisive. The relational network of the
auditor was thus not studied completely. Consequently, this research brings
only one contribution to the relationship theory, extremely complex to build.
In conclusion, understanding the business of the client (along with general
audit knowledge) is perceived by both auditors and clients as key to making a
more competent and useful auditor and knowing how to be ‘independent’ actu-
ally comes from this understanding of the business issues. Consequently the
auditor needs to know how to be independent within this context of business
understanding/empathy and developing relations (which become increasingly
personal in the sense that this involves repeated social exchanges and increasing
trust). Knowing how to be independent in this context therefore becomes a key
aspect of the skills and presumably education and training needs of auditors,
and this takes the notion beyond the issues of financial dependence that tends
to be seen as the main risk to auditor independence in some of the literature
that discusses independence, and the more rule-based systems of ethics which
centre on prohibiting certain things.
Acknowledgements
The author would like to express her gratitude to Michael K. Power for his most
helpful suggestions during her research work. The constructive comments by
seminar participants at the London School of Economics, the 2001 Workshop
on the Future of Audit and the Profession and the two anonymous referees are
gratefully acknowledged. This contribution has been supported, in part, by a
research grant from the Compagnie Nationale des Commissaires aux Comptes
(C.N.C.C.).
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APPENDICES
Appendix 1. Interview guide with auditors, financial directors, directors and ‘insti-
tutional people’ (1st step)
Interview them
The audit process
Themes to tackle
Introduction
† Review: date of the first mandate, number of mandates, . . .
1) The audit process
† The choice of an audit company: criteria, constraints, . . .
† The mission of a legal audit : development of the mission, information
movements, . . .
† External and internal audits
† Board of directors and audit committee
2) The evaluation of the audit process
† The quality of a legal audit: quality level, determinants, characteristics, . . .
† Satisfaction of the interviewee concerning the conducting of the legal audit:
satisfaction degree, determinants, . . .
† Criteria de choice of an audit company
3) Conclusion
† Current and future evolution of a legal audit
† Themes that are not tackled but that could be relevant
176 C. Richard
Appendix 2. Interview guide with the managers’ team and the auditors’ team (2nd step)
Example of the guide for the managers’ team
Initial question
Could you talk with me about the way you manage the relationship
of your firm with its auditors?
Themes to tackle
1) The relationship with the auditors of the holding
Precondition: the role of the interviewee
a) The information movements
† onships between the firm and its two auditors
b) The management of the relationship
† The everyday management: various meetings; received/sent
documents
† The extraordinary management: types of problems that need

the intervention of the audit company (examples); types of inter-
vention (examples)
† Personal relationships with the auditors
c) The decision making and the negotiation
† The choice of an auditor for a fiscal audit, an organisational
audit, . . .
† The fees negotiation
2) The relationship wit the auditors of the subsidiary companies
† Relationships between the holding and the subsidiary companies
† Relationships between the holding and the audit companies of the
subsidiary firms
† Relationships between the subsidiary companies
† The everyday management: various meetings; received/sent
documents; the subsidiary companies with which the
communication is difficult (reasons); advantages and
disadvantages of one audit company or a lot of audit companies
† The extraordinary management: types of problems that need the
intervention of the holding and/or audit company (examples);
types of intervention (examples)
† Personal relationship with: the directors of the subsidiary
companies ; the auditors of the subsidiary companies
c) The decision making and the negotiation
† The choice of a auditor for a new subsidiary company, an acqusition
† The fees negotiation
(continued )
Appendix 2. Continued
3) The relationship with the board of directors

† Relationships between the board of directors and the audit
company
† The everyday management: the role of the board of directors
(meetings, received/sent documents); the role of the audit commit-
tee (meetings, received/sent documents); the weight of some
shareholders
† The extraordinary management: types of problems that need the
intervention of the audit company (examples); types of interven-
tion (examples)
† Personal relationships
Conclusion: Themes that are not tackled but that could be relevant
Appendix 3. Interview guide with the financial director and the partner (3rd step)
Example of the guide for the auditor
Questions to ask
1) What was your academic formation?
2) What was your professional course?
3) Since which date are you the auditor of this company?
4) Has you known the financial director before auditing this company?
(Example : reputation, associations, clubs . . . ; Importance of the fact to
know the financial director, weight of the relational network)
5) How many times do you see yourselves?
6) How many times do you phone yourselves?
7) Do you share a cup of coffee? A meal?
8) What was the most difficult professional experience?
9) What was the most successful professional experience?
10) Which experience are you the proudest of? Why?
11) Did there be incidents? Which reactions were expected? (Alternative: if you have an
incident, what will you do?)
12) What are your expectations with this relationship?
13) How do you verify these expectations?
14) Do you always trust to the financial director? (Contradiction: the fees negotiation)
15) How do you verify this trust?
16) Do you see the financial director outside your job?
17) Do you share with the financial director some interests other than professional?
178 C. Richard
Appendix 4. Summary of the conducted interviews and of the sample characteristics
Organisation Number of
(F ¼ firm; Position in the firm of the Research Number of hours per
A ¼ audit firm) interviewee(s) step(s) interviews interview(s)
F– 1 Legal director 1st 1 1.30
F– 2 Financial manager 1st 1 2
Group accounts director 2nd/3rd 2 3.30
Internal audit director 2nd 1 2
General director 2nd 1 2
(subsidiary company 1)
F– 3 Financial director 1st 1 1.30
F– 4 Financial director 1st 1 1
F– 5 Financial director 1st/2nd/3rd/4th 4 6
Accounting director 2nd 1 2.30
F– 6 Financial director 1st 1 2
Group accounts director 1st 1 1.30
F– 7 Economic business 1st 1 1.30
manager
F– 8 Vice-president 1st 1 1
F– 9 Director of shareholders 1st 1 1.30
relationships
F – 10 Financial assistant 2nd 1 1
director
Internal audit director 1st/2nd/3rd 3 6
Group accounts director 2nd 1 1
F – 11 Vice-president 1st 1 2
Director 1st 1 1.30
F – 12 Vice-president 1st 1 1
Director 1st 1 1
Director 1st 1 1
F – 13 Director 1st 1 1
Director 1st 1 1
Director 1st 1 1
F – 14 Financial director 3rd 1 2.30
F – 15 Group accounts director 3rd 1 1
F – 16 Internal audit director 3rd 1 1.30
A –1 Partner 1st 1 1.30
A –2 Partner 1st 1 2
Partner 2nd/3rd 2 4
Manager 2nd 1 1.30
(continued)
Appendix 4. Continued
Organisation Number of
(F ¼ firm; Position in the firm of the Research Number of hours per
A ¼ audit firm) interviewee(s) step(s) interviews interview(s)
Manager 1st 1 1
A –4 Partner 2nd/3rd/4th 3 4.30
Manager 1st 1 1
A –5 Manager 1st 1 1
Partner 2nd/3rd 2 4
A –7 Partner 1st 1 1.30
A –8 Partner 3rd 1 2
COB Accounting director 1st 1 2
CNCC Training manager 1st 1 1
Adviser 1st 1 1
MEDEF Adviser 4th 1 3

Adviser 4th 1 1
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This article was downloaded by: [RMIT University]

On: 26 July 2013, At: 02:23

European Accounting Review

Why an auditor can't be

To link to this article: http://dx.doi.org/10.1080/09638180500104832

PLEASE SCROLL DOWN FOR ARTICLE

Why an Auditor can’t be Competent

ABSTRACT This research proposes an understanding of the role of the relationship

Despite recent discoveries of embezzlement and excessive risk taking in

0963-8180 Print=1468-4497 Online=06=020153–27 # 2006 European Accounting Association

1. The Research Question – For a Relational Vision of Auditing Process

1.1. The Research Object: The Audit Process

the credibility of the information contained in the financial statements of the

1.2. The Research Objective: The Audit Quality

In a classical article, De Angelo (1981, p. 186) defines audit quality as “the

on two separated probabilities: the auditor discovers the breach (competence)

1.3. The Research Perspective: A Relational Approach

2. The Method – The Analysis of the Relationship Between the Finance

2.1. The Data Collection: A Qualitative and Iterative Approach

focusing on the ‘particular’ relationship between the financial director of the

2.2. An Interpretation Based on Two Theories

2.2.1. Professional relationship and personal relationship

2.2.2. Towards an understanding of the professional/personal overlap

sick”. “The networks of social relationships penetrate in an irregular way and

3. The Interpretation Results – A Peers’ Relationship: A Determinant

an equality of the contributions. A more detailed understanding of this relation-

3.1. The Analysis of the Peers’ Relationship

3.1.1. A static vision of peers’ relationship: its emergence conditions

phenomenon, defined as the peers’ relationship, has strong probabilities of emer-

3.1.2. A dynamic vision of peers’ relationship: its characteristics

by their peers. It occurred that the audit conducted by S. on V. was reviewed by

accounts director explained: “There is an international accounting standard that

3.2. The Influence of the Peers’ Relationship on Audit Quality

3.2.1. Peers’ relationship and independence

3.2.2. Peers’ relationship and competence

3.2.3. Peers’ relationship and audit quality

quality. Subsequently, it would be interesting to conduct a ‘joint’ reading of the

important determinant of auditor competence. The balance between these two

research opened a reflection on the definition and the characterisation of the

† The extraordinary management: types of problems that need

3) The relationship with the board of directors

Appendix 4. Summary of the conducted interviews and of the sample characteristics

MEDEF Adviser 4th 1 3

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