Can audit firms be trusted (again)?

Abstract

Accounting research demonstrated that financial audit can hardly be conceived of as a trust engendering technology yet. According to the sociological theory of trust, trust in auditors is divided into first order and second order trust. First order trust aims at identifying the factors that primarily contribute to the auditor’s trustworthiness, whereas second order trust mirrors the capability of the trust on auditors to be transferred to their clients. In order to gauge if audit can be trusted again and to analyze if trust can be transferred and how, this study investigates the current audit industry through the lens of the sociological theory of trust. Results from a panel data analysis show that audit professionalism, commercial orientation and market concentration are the main determinants of first order trust. Moreover, findings from this study highlight that an audit firm’s trustworthiness is negatively transferred to its client. This study adds knowledge to the theory of trust developed by Sztompka, by providing evidence of which factors impact on the primary object of trust, and how it is possible to transfer them on the secondary object of trust. Indeed, empirical evidence supports that part of literature arguing that auditing is primarily aimed at reproducing social order, whereas limited support is found to the trust engendering role of financial audit.