Auditor-client relationships are essential because they may influence the audit process and outcome. Poor audit-client relationships may significantly impair audit efficiency, as seen in the recent Hyflux and KPMG audit episode. 

This article explores how strong auditor-client relationships impact audit quality. 

Impact of Auditor-Client Relationships on Audit Quality 

Positive Impacts 

Good auditor-client relationships generally have positive benefits for audit quality and outcome. 

1. Improved Knowledge 

Long-term auditor-client relationships of three to five years or more help auditors familiarise themselves with the client company’s processes, risks, and management. It improves the auditor’s knowledge of the company’s financial reporting processes and boosts good working relationships with accounting team members. Auditors and clients with a more prolonged relationship can relate to each other more personally and comfortably. This fosters amicable communication, negotiation, and improved information sharing. 

With access to comprehensive and transparent information, auditors can conduct audits with better accuracy, potentially helping to reduce the risks of material misstatements. 

2. Better Service 

A study conducted on individual auditors and clients revealed that better client treatment led to the provision of more value-added services by auditors. 

An audit often involves requesting additional information from staff members like bookkeepers, accountants, and clerks. Audit requests could sometimes inconvenience employees as it interrupts their daily work. Client employees may view auditors with trepidation or see them as a nuisance. It can lead to unpleasant interactions between client employees and audit teams during the audit process. Auditors may be unwilling to spend more time discussing insights and offering constructive feedback to such clients.

Individual auditors who perceived courteous and fair treatment from clients were more willing to go beyond the core audit scope to provide additional advice and insights for the client company’s benefit. For instance, auditors might provide extra feedback and recommendations on internal controls, financial accounting, and business risks. 

Negative Impacts 

Long-term client relationships also have their downsides. Auditors too familiar with a client company’s employees and processes may lose their independence and objectivity. 

1. Client Influence 

High client persuasion also has downsides. Auditors tend to be influenced by client persuasion when the audit emphasises developing positive client relationships. Auditors in long-term working relationships are more susceptible to client influence as increased trust levels create greater reliance on management representations and client-provided information. Auditors who feel comfortable with the client may not see the need to conduct extensive evidence-gathering, increasing the risk of failing to identify issues. 

Hyflux and KPMG Audit Episode 

Hyflux, a water treatment firm headquartered in Singapore, filed for bankruptcy protection in 2018 and went into liquidation in 2021. Hyflux accused KPMG of negligence in auditing their 2011-2017 financial records. KPMG has refused these allegations, and argued in the defence filed last week that the obligation to prepare the financial statements in compliance with the law and reporting standards lies with the plaintiffs’ management and board. 

KPMG emphasised that it had audited Hyflux’s financial statements in accordance with professional accounting standards and there were no material misstatements. The auditors had also conformed with professional auditing standards when making judgement calls. As such, KPMG had maintained a professional working relationship with Hyflux. 

In 2022, Hyflux’s directors faced charges related to disclosure and negligence. Conclusion 

Client relationships affect auditors’ independence and objectivity. A clean audit is only possible if the client provides complete and accurate disclosure of information. 

Audit firms and clients must strive to achieve a balanced auditor-client relationship to ensure that auditors gain familiarity with the company without losing their objectivity, integrity, and independence. Only then will investors and the public have confidence in the independent assessments of auditors.