Trust, control and knowledge transfer in small business networks

The ability to transfer knowledge effectively in the networks of small and medium-sized firms (SMEs) is paramount for supporting firm competitiveness. Our research is the first one that explores the joint effect of trust and control mechanisms on knowledge transfer in the case of networks of SMEs. We use a multiple case study approach based on six Italian networks of SMEs. We analyse the joint impact of different ethical based trustworthiness factors—namely benevolence and integrity—and the levers of control (LOCs)—namely, belief, boundary, diagnostic and interactive LOCs—on knowledge transfer between SMEs in networks. We find that trust substitutes for the implementation of boundary, diagnostic, and belief tools, while it works jointly with interactive tools in order to support knowledge transfer. These insights not only provide a rich foundation for follow-up research, but also inform SME managers about how to increase the effectiveness and efficiency of knowledge transfer with their network partners

Competence trust, goodwill trust and negotiation power in auditor-client relationships

Purpose: The purpose of this paper is to investigate how competence trust (i.e. trust regarding the ability of the counterpart) and goodwill trust (i.e. trust regarding the benevolence and integrity of the counterpart) affect the probability that the auditor or the client stand up to the respective negotiation partner’s position in situations of disagreement in the auditing relationship. Design/methodology/approach: Two experiments were conducted, one with 149 auditors and one with 116 chief financial officers (CFOs). Both auditors and CFOs had to indicate the likelihood that they stand up to the other party’s preferred position in a disagreement on the materiality of unrecorded liabilities. The data derived from these experiments were analyzed using hierarchical OLS. Findings: The results indicate that both auditors and CFOs who take their respective negotiation partner in the audit for highly competent are less likely to stand up to them in situations of disagreement. Interestingly, goodwill trust appears to be irrelevant for the negotiation outcome. Practical implications: The findings are highly relevant for regulators, because they inform about the crucial importance of competence trust for the auditing negotiation outcome and thus put the so-called “trust-threat” into perspective. Originality/value: The study adds to the literature on the role of the context for auditor-client negotiations by exploring the role of two distinct forms of trust on the outcome of these negotiations

Trust and Professional Skepticism in the Relationship between Auditors and Clients – Overcoming the Dichotomy Myth

This study empirically investigates the relationship between auditors’ identification-based trust in client firms’ managers (CEOs/CFOs) and their perceptions of auditors’ professional skepticism. We employ a multi-method approach: First, in study 1, we approached auditors and clients using narrative interviews in order to identify the working definitions of interpersonal trust and professional skepticism and also to develop an empirical and testable hypothesis against the backdrop of the current literature. Second, in study 2, an ordinary least squares regression based on data collected from 233 real auditor–client dyads in Germany reveals that auditors’ identification-based trust is positively associated with their clients’ perception of the auditors’ professional skepticism. The identified coexistence of trust and professional skepticism in auditor-client dyads implies that regulatory measures that impede the evolution of trust between auditors and their clients will fail to enhance professional skepticism. Instead, regulations should give auditors and their clients sufficient leeway to establish identification-based trust

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.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