This article summarizes our recent study, “Auditor Commitment to Privately Held Clients and its Effect on Value-Added Audit Service” (Herda and Lavelle 2013), which examines how the relationship between individual auditors and their clients affects the extent of value-added services that clients receive. Based on a survey of 204 auditors at two public accounting firms, we find that the auditor-client relationship, measured in terms of the auditor's commitment to the client (i.e., client commitment), develops in response to auditor perceptions of fair treatment and support received from the client. Higher levels of client commitment lead to more value-added services (e.g., management letter comments). The results indicate that auditors' perceptions of client fairness are essential in building strong auditor-client relationships. Stronger relationships yield greater levels of service that go beyond the core audit requirements.

This paper summarizes the findings, conclusions, and practical implications of our recent study (Herda and Lavelle 2013) concerning the relationship between individual auditors and their privately held clients, and how it affects the extent of value-added audit service that the client receives. We define value-added audit services as client-service activities, resulting from an audit, that are not directly related to verifying the financial statements, and are beneficial to clients and audit firms. Examples of value-added services include management comments and other types of auditor advice, as well as feedback on accounting, internal controls, and general business issues.

Auditors, as a byproduct of performing audits and rendering audit reports, also can report to the client useful observations and recommendations. These value-added audit services are particularly important to privately held clients, as they seek information and advice from auditors in addition to core audit services (Fontaine and Pilote 2011, 2012). Audit firms that primarily target middle market, privately held companies as potential clients often use the potential for value-added services as a selling point for their assurance services. Indeed, the websites of several of these firms portray their assurance services as services that provide value beyond the traditional audit, discussing how they can provide insights and recommendations that can help clients to improve decision-making, profitability, and administrative practices.

Based on a survey of 204 auditors at two public accounting firms that serve primarily privately held clients, we find that auditor commitment to clients develops in response to auditor perceptions of fair treatment and support received from the client. In turn, we find that auditors who are more committed to their clients provide them with more value-added audit services. Our results highlight the important role that auditor perceptions of client fairness play in building strong relationships between individual auditors and their clients. Stronger relationships yield enhanced levels of client service that go beyond the core audit requirements.

The remainder of this paper is structured as follows. The second section summarizes relevant research on commitment and value-added audit services. The third section discusses the survey used in the study, and the fourth section summarizes the results. We conclude with an overview of the findings and a discussion of the study's practical implications for public accounting firms and clients.

A recent study surveyed 306 privately held clients and found that clients would like auditors to provide services beyond the core audit requirements (Fontaine and Pilote 2011, 2012). Prior studies argue that much of the value of the audit comes from the value-added services above and beyond the basic audit requirements (e.g., Beattie et al. 2000; Eilifsen et al. 2001). Managers of privately held companies desire more than a clean audit opinion from the audit engagement, and frequently look to the management letter as evidence of value-added services (Metzler 2005). Manson et al. (2001) surveyed privately held clients and audit firms and found that both parties consider the management letter to be a valuable outcome from the audit process. Clients value auditor advice on internal control and accounting systems, accounting methods and policies, and general business and taxation issues. Further, accounting firms value the management letter as a useful tool to improve their reputation with clients (Manson et al. 2001). Moreover, audit firms can use management letters to demonstrate that they truly understand their clients' needs and businesses (Wallace 1983; Stone and Frigo 1988; Metzler 2005), which, in turn, satisfies their clients and reduces the likelihood that they will look elsewhere for assurance services.

Social exchange theory provides the theoretical basis for our study. Social exchange relationships between employees and organizations are considered to be subjective, relationship-oriented contracts, characterized by a shared exchange of socio-emotional benefits, cooperation, trust, and a long-term focus (Blau 1964; Van Dyne et al. 1994). Social exchange relationships often develop through positive interactions, and result in a sense of relational obligation between the “exchange partners.” Social exchange relationships between employees and organizations strengthen the impetus for employees to provide the organization with beneficial outcomes, because they feel relationally obligated to support the organization (Cropanzano and Mitchell 2005).

Commitment to an organization can gauge the extent to which employees perceive themselves to be in a strong social exchange relationship with their organization (Cropanzano and Mitchell 2005; Herda and Lavelle 2011). Affective organizational commitment has been defined as “the relative strength of an individual's identification with and involvement in a particular organization” (Mowday et al. 1979, 226). Recent research has provided a useful framework for better understanding employee commitment to various parties that they encounter at work. This framework uses a “multiple commitments” perspective and contends that employees sustain distinct levels of commitment toward various parties, including the employing organization, supervisors, coworkers, and clients (Reichers 1985; Liden et al. 2003; Lavelle et al. 2007). In our study, we specify the audit client as the auditor participants' relevant social exchange partner. Recent research finds that privately held audit clients prefer a relational (social exchange-based) approach with their auditors to a transactional approach (Fontaine and Pilote 2011, 2012), supporting the notion that clients can be social exchange partners for auditors.1 We predict that auditors' commitment to clients develops in response to perceived fair treatment and support received from clients, and that higher commitment results in auditors providing more value-added services to clients.

We test our predictions with a survey of 204 auditors at two public accounting firms in the U.S. (a large national firm and a large regional firm). Approximately 94 percent and 97 percent of 2010 audit revenues for the national and regional firm, respectively, were provided by privately held clients. The sample consisted of 70 staff auditors, 62 seniors, 40 managers, 23 senior managers, and 9 partners.

Respondents answered questions related to the predictors of client commitment, which include perceived client fairness (i.e., how fairly clients are perceived to treat auditors) and perceived client support (i.e., the extent to which auditors perceive that clients care about auditors' well-being). Respondents were asked to consider their main audit client (the client on which they spend the most amount of time throughout the year) when answering questions. Responses for the constructs were elicited on widely used seven-point scales (e.g., 1 = strongly disagree, 7 = strongly agree). An example of an item measuring perceived client fairness is “Overall, I am treated fairly by my client.” An example of an item measuring perceived client support is “This client really cares about my well-being.” An example of an item measuring client commitment is “This client has a great deal of personal meaning for me.”

To measure the level of value-added audit services provided to clients, we asked auditors to indicate the extent to which they provide their client with items intended to help the client, such as management comments and other advice and resources. The three items we used to capture value-added services are consistent with the concept of value-added audit services from the accounting literature (e.g., Eilifsen et al. 2001; Wyatt 2004). The items are: “I provide my client with insights on ways they can improve their business processes and internal controls,” “I write or review management recommendation comments that may appear in the management letter,” and “I provide my client with (or refer them to) materials such as summaries or implementation guidance on industry-specific or general accounting issues that may affect them” (all measured based on 1 = never, 7 = to a large extent).

Consistent with our predictions, strong social exchange relationships develop between auditors and their clients in response to auditor perceptions of fair treatment and support received from the client. Specifically, perceived client fairness predicts perceived client support, and perceived client support predicts auditor commitment to the client. Auditor tenure with the client also yielded greater commitment to the client. We find that higher client commitment is associated with more value-added services. Also, as expected, more experienced auditors provide their clients with more value-added audit services. Figure 1 depicts our results.

FIGURE 1

Model of Value-Added Audit Services

FIGURE 1

Model of Value-Added Audit Services

Close modal

We also separated respondents into two groups and tested the predictions for each group. The staff group consisted of staff and seniors, and the management group consisted of managers, senior managers, and partners. We divided the sample this way because staff and seniors perform different types of audit procedures compared to engagement management (Hirst and Koonce 1996; Trompeter and Wright 2010; Han et al. 2011; Luippold and Kida 2012). The type of work performed by staff and seniors, or their relative lack of business experience, may limit their ability to provide insights on more complex business processes or accounting issues. Indeed, our analyses revealed that the management group provided clients with significantly higher levels of value-added services compared to the staff group. Nevertheless, our predictions were supported for each group. Thus, our research model was effective in predicting variation in value-added audit services for auditors at both higher and lower levels.

Value-added audit services are very important to privately held clients because they desire recommendations and advice that go beyond the basic audit requirements (Fontaine and Pilote 2011, 2012). We examine how the relationship between individual auditors and their privately held clients can impact the extent of value-added service provided to clients. We find that perceived fair treatment from clients contributes to the development of a social exchange relationship between auditors and their clients, which, in turn, is associated with more value-added services.

Our study has important implications for clients. Audit requests often inconvenience a number of people within the client organization. Auditors can interrupt employees' normal duties and, consequently, the arrival of the audit team is often viewed unfavorably—particularly by lower-level employees (e.g., bookkeepers, clerks). Notwithstanding the usual inconveniences that go along with an audit, client personnel should endeavor to view auditors as valuable service providers, as opposed to nuisances. Client managers can facilitate this viewpoint by setting a positive tone at the top—communicating to lower-level employees the importance of the audit and encouraging them to treat auditors fairly. There are several ways in which clients can promote auditor perceptions of fair treatment, starting with simply treating auditors courteously in personal interactions and electronic communications. Other ways include making themselves available to meet with auditors instead of avoiding them, providing comfortable space in which to work at the client's location, supplying requested documents and schedules on a timely basis, and being patient when responding to auditors' questions. Clients that act as if every audit request is a major inconvenience and make obvious to auditors that they do not want them at their place of business are unlikely to be perceived as fair. Our research indicates that, in response, auditors are less likely to provide these clients with much in the way of value-added services.

Our study also has important implications for audit firms. Auditors use management comments and other value-added services to improve their reputation with clients, thereby leading to a greater likelihood of retaining existing clients and gaining new ones as a result of positive referrals. How can audit firms encourage clients to treat their auditors fairly (which, in turn, yields a strong social exchange relationship and more value-added services)? Social exchange is just that—an exchange relationship. Audit firms that treat clients fairly are more likely to receive fair treatment in return. Audit firms can enhance client perceptions of fair treatment by demonstrating to clients that they respect them and their time. This may be accomplished by getting audit request lists to clients well in advance of the audit team's arrival, and ensuring that on-site work is performed at a convenient time for the client. Also, clients usually prefer consistency in engagement team members from year to year. This consistency is particularly important, as our study finds that the more time an auditor spends with a client, the more committed to the client that the auditor becomes (which, in turn, yields greater value-added services). Consequently, audit firms should do what they can to promote continuity in client engagement teams. These efforts will enhance levels of cooperation between audit team members and client personnel.

Also, clients that treat auditors more fairly may place greater value on the auditors and the audit process. This greater value may point to a propensity on the part of the client to purchase additional services from the firm. Auditors should monitor clients' attitudes and behaviors and use them as an indication of their potential willingness to purchase additional services.

Beattie
,
V
.,
S
.
Fearnley
,
and
R
.
Brandt
.
2000
.
Behind the audit report: A descriptive study of discussions and negotiation between auditors and directors
.
International Journal of Auditing
4
:
177
202
.10.1111/1099-1123.00312
Blau
,
P. M
.
1964
.
Exchange and Power in Social Life
.
New York, NY
:
John Wiley
.
Cropanzano
,
R
.,
and
M
.
Mitchell
.
2005
.
Social exchange theory: An interdisciplinary review
.
Journal of Management
31
:
874
900
.10.1177/0149206305279602
Eilifsen
,
A
.,
W. R
.
Knechel
,
and
P
.
Wallage
.
2001
.
Application of the business risk audit model: A field study
.
Accounting Horizons
15
(
3
) :
193
207
.10.2308/acch.2001.15.3.193
Fontaine
,
R
.,
and
C
.
Pilote
.
2011
.
An empirical study of Canadian companies to determine clients' preferred relationship approach with their financial auditor
.
Journal of Marketing Trends
1
(
September
) :
61
69
.
Fontaine
,
R
.,
and
C
.
Pilote
.
2012
.
Clients' preferred relationship approach with their financial statement auditor
.
Current Issues in Auditing
6
(
1
) :
P1
P6
.10.2308/ciia-50116
Han
,
J
.,
K
.
Jamal
,
and
H-T
.
Tan
.
2011
.
Auditors' overconfidence in predicting the technical knowledge of superiors and subordinates
.
Auditing: A Journal of Practice & Theory
30
(
1
) :
101
119
.10.2308/aud.2011.30.1.101
Herda
,
D. N
.,
and
J. J
.
Lavelle
.
2011
.
The effects of organizational fairness and commitment on the extent of benefits Big 4 alumni provide their former firm
.
Accounting, Organizations and Society
36
(
3
) :
156
166
.10.1016/j.aos.2011.02.005
Herda
,
D. N
.,
and
J. J
.
Lavelle
.
2013
.
Auditor commitment to privately held clients and its effect on value-added audit service
.
Auditing
:
A Journal of Practice & Theory 32 (1)
.
Hirst
,
D. E
.,
and
L
.
Koonce
.
1996
.
Audit analytical procedures: A field investigation
.
Contemporary Accounting Research
13
(
2
) :
457
486
.10.1111/j.1911-3846.1996.tb00511.x
Lavelle
,
J. J
.,
D. E
.
Rupp
,
and
J. J
.
Brockner
.
2007
.
Taking a multifoci approach to the study of justice, social exchange, and citizenship behavior: The target similarity model
.
Journal of Management
33
(
6
) :
841
866
.10.1177/0149206307307635
Liden
,
R. C
.,
S. J
.
Wayne
,
M. L
.
Kraimer
,
and
R. T
.
Sparrow
.
2003
.
The dual commitments of contingent workers: An examination of contingents' commitment to the agency and the organization
.
Journal of Organizational Behavior
24
:
609
625
.10.1002/job.208
Luippold
,
B. L
.,
and
T. E
.
Kida
.
2012
.
The impact of initial information ambiguity on the accuracy of analytical review judgments
.
Auditing: A Journal of Practice & Theory
31
(
2
) :
113
129
.10.2308/ajpt-10259
Manson
,
S
.,
S
.
McCartney
,
and
M
.
Sherer
.
2001
.
The value of management letters to unlisted companies
.
British Accounting Review
33
:
549
568
.10.1006/bare.2001.0183
Metzler
,
J. C
.
2005
.
How the AICPA helps members serve small businesses
.
Journal of Accountancy
199
(
3
) :
26
28
.
Morgan
,
R
.,
and
S
.
Hunt
.
1994
.
The commitment-trust theory of relationship marketing
.
Journal of Marketing
58
(
3
) :
20
38
.10.2307/1252308
Mowday
,
R. T
.,
R. M
.
Steers
,
and
L. W
.
Porter
.
1979
.
The measurement of organizational commitment
.
Journal of Vocational Behavior
14
:
224
247
.10.1016/0001-8791(79)90072-1
Reichers
,
A. E
.
1985
.
A review and reconceptualization of organizational commitment
.
Academy of Management Review
10
:
465
476
.
Stone
,
P. F
.,
and
M. L
.
Frigo
.
1988
.
The neglected management letter
.
The CPA Journal
(
September
) :
39
43
.
Trompeter
,
G
.,
and
A
.
Wright
.
2010
.
The world has changed—Have analytical procedure practices?
Contemporary Accounting Research
27
(
2
) :
669
700
.10.1111/j.1911-3846.2010.01021.x
Van Dyne
,
L
.,
J. W
.
Graham
,
and
R. M
.
Dienesch
.
1994
.
Organizational citizenship behavior: Construct redefinition, measurement and validation
.
Academy of Management Journal
37
:
765
802
.10.2307/256600
Wallace
,
W. A
.
1983
.
More effective management letters
.
The CPA Journal
(
December
) :
19
27
.
Wyatt
,
A. R
.
2004
.
Accounting professionalism—They just don't get it
.
Accounting Horizons
18
(
1
) :
45
53
.10.2308/acch.2004.18.1.45
1

A transactional approach is based on competition and self-interest, resulting in an arm's-length relationship between buyers and sellers (Morgan and Hunt 1994).

Author notes

We thank Rich Houston and Dorsey Baskin (editors) for their helpful comments and suggestions.