The auditor as a change agent for SMEs: the role of confidence, trust and identification

Although the auditor is one of the most important external business partners for an SME in terms of knowledge transfer and the mitigation of internal risks, an investigation of the performance drivers of the qualitative change induced by auditing has not taken place to date. Based on 166 auditor–client dyads (audit partners, CEOs/CFOs) of SMEs in Germany, we narrow this gap by examining the effects of auditor’s trust and auditor’s confidence in the client management and auditor’s identification with the client firm on the qualitative change induced (i.e.level of knowledge transfer, improvement of the internal control system). We find that the auditor’s identification with the client firm and the auditor’s confidence in the client management are highly relevant to the level of qualitative change perceived by the client, while previously used indicators of auditor expertise (e.g. audit firm size, level of non-audit services) do not reveal a significant effect. Interestingly, auditor’s trust in the client does not exert a significant effect, which might be due to the special setting of auditor–client relationships. In addition to the theoretical contributions, the findings have practical implications for SMEs as well as for auditors.