Auditor Relational Strategy and Risk of Fraudulent Financial Statements

Abstract

AUDITOR RELATIONAL STRATEGY AND RISK OF FRAUDULENT FINANCIAL STATEMENTS

ABSTRACT

This study examines how auditor relational strategy influences the risks of fraudulent financial statements. The study uses panel data regression on 2,890 year-observations of companies listed in Bursa Malaysia during the period 2013-2017 to evaluate possible relationships between auditor relational strategy and risks of fraudulent financial statements. The results show that the employed of auditor relational strategy adds value by helping auditors reduce risks of fraudulent financial statements, suggesting that auditors may able to maintain their scepticism although they employing auditor relational strategy. The findings propose that even when auditor-client relationship are close, as long as an auditor can uphold their independent in auditor relational strategy, the risk of fraudulent financial statements can be diminished. Therefore, to ensure that scepticism remains a relevant and consistent practice among auditors, policymakers may need to consider revising the auditor’s code of ethics to address current issues. This study makes a valuable contribution to the literature by examining the importance of auditor relational strategy in assisting auditors in minimizing risks of fraudulent financial statements from a network theory perspective.