A qualitative study on how Covid-19 will affect audit quality

Auditing in times of change:

A qualitative study on how Covid-19

will affect audit quality

Master’s Thesis 30 credits

Programme: Master’s Programme in

Accounting and Financial Management Specialisation: Financial Accounting

Department of Business Studies

Uppsala University

Spring Semester of 2021

Date of Submission: 2021-06-02

Christoffer Johnsson

Nicklas Persson

Supervisor: Roland Almqvist

Acknowledgements

We would like to start by thanking our supervisor Roland Almqvist for all the support and

advice we have been given during this whole process. We would also like to thank all the

members in our seminar group for giving us valuable and relevant feedback. Last but not least,

we would also want to thank all of the respondents for taking their time to participate and share

their interesting experiences.

___________________ ___________________ Christoffer Johnsson Nicklas Persson

Abstract Purpose - This study explores how Covid-19 may affect audit quality and provide early

insights if the pandemic has already affected audit quality in Sweden.

Design/methodology/approach - This paper uses qualitative data obtained through semi-

structured interviews with eight Swedish authorized auditors within Big Four to explore

possible impacts on three key aspects for audit quality. These include Going-concern

assessments, Auditor-client relationship, and Auditor-independence.

Findings - Even though the Covid-19 pandemic is not over, it has had fewer effects on audit

quality than experts and researchers predicted. Even though the pandemic has changed the

communication and the relationship between the auditor and client, the findings state no

significant effect on audit quality within the auditor-client relationship. The same goes for

auditor-independence. However, the findings of this study indicate that making accurate going-

concern assessments has and will be more complex and thus threaten audit quality.

Practical contribution – We anticipate that auditors need to provide a greater focus on GC-

assessments as stakeholders require greater disclosure. Further, auditors and clients should gain

on the increased use of digital communication by using it as a complement to physical meetings

in the future.

Originality/Value - This study is, to the best of our knowledge, one of the first studies that

explore the potential impacts of the Covid-19 pandemic on audit quality with empirical

evidence. Since this study is conducted in the middle of the pandemic (Spring 2021), the results

can be seen as indications for future researchers that beyond the pandemic seek to explain how

the Covid-19 pandemic affected audit quality as it is crucial for the audit community to follow

the consequences of the pandemic.

Keywords - Audit quality, Covid-19, Auditor-client relationship, Going-concern assessments,

Auditor-independence.

Table of Contents 1.0 Introduction ................................................................................................................................. 1

1.1 Research Problem .................................................................................................................... 2

1.2 Purpose and Contribution ......................................................................................................... 4

1.3 Delimitations ........................................................................................................................... 5

2.0 Literature Review ........................................................................................................................ 6

2.1 Covid-19.................................................................................................................................. 6

2.2 Audit Quality ........................................................................................................................... 8

2.3 Four-factor model of audit quality ............................................................................................ 8

2.4 Modified conceptualization of Audit Quality ............................................................................ 9

2.5 Going-Concern assessments ................................................................................................... 10

2.5.1 The Complexity of GC-assessments ................................................................................ 11

2.5.2 Effects of Covid-19 ......................................................................................................... 12

2.6 Auditor-Client Relationship ................................................................................................... 13

2.6.1 The importance of Auditor-Client Relationship ............................................................... 13

2.6.2 Proactive relationship ...................................................................................................... 13

2.6.3 Reactive relationships ..................................................................................................... 14

2.7 Auditor-Independence ............................................................................................................ 15

2.7.1 Independence during unstable times ................................................................................ 16

2.8 Model of analysis ................................................................................................................... 16

3.0 Method ...................................................................................................................................... 18

3.1 Research Design .................................................................................................................... 18

3.2 Data Collection ...................................................................................................................... 19

3.3 Interviews .............................................................................................................................. 20

3.4 Selection Criteria ................................................................................................................... 21

3.5 Pilot Interview ....................................................................................................................... 22

3.6 Analysis ................................................................................................................................. 23

3.7 Method Discussion ................................................................................................................ 23

3.7.1 Trustworthiness ............................................................................................................... 24

3.8 Ethical Consideration ............................................................................................................. 25

4.0 Empirical Findings .................................................................................................................... 26




4.4 Empirical reference-model ..................................................................................................... 37

5.0 Analysis .................................................................................................................................... 38




6.0 Conclusion and Discussion ........................................................................................................ 43

6.1 Suggestions for future research .............................................................................................. 44

List of References............................................................................................................................ 46

Appendix ........................................................................................................................................ 54

List of Figures and Tables

Figure 1: Illustration based on Duff's (2009) four-factor model. ......................................................... 9

Figure 2: Model of analysis ............................................................................................................. 17

Figure 3: Empirical reference-model ................................................................................................ 37

Table 1: Illustration of non-scientific reports.................................................................................... 19

Table 2: Respondents interviewed ................................................................................................... 22

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1.0 Introduction

“The pandemic creates many financial, operational and personal difficulties. Professional

accountants must now, more than ever, remain focused on the public interest and their ethical

responsibilities.” (Dr Stavros Thomadakis, Chairman IESBA, 2020, p.1)

The role of auditing has since its introduction been a critical cornerstone in the world’s financial

systems. Swedish Inspectorate of Auditors (SIA) (n.d.a) empathized that auditors’

responsibility within external auditing is to scrutinize the company management and their

annual report together with its bookkeeping. As auditing assures that the company’s financial

statements are “true and fair”, auditing underpins the trust between the management of the

company and the company’s stakeholders (PwC, 2013).

Several researchers such as Wallace (2004), Jeacle (2014, 2017), and Andon et al. (2014) state

that the audit role is emerging and has become even more relevant in the last decade. Philipp

Hallauer, partner at KPMG Switzerland, also state in his article (KPMG, 2020b) that due to

rapid technological changes and an increase in external events, the call for more assurance from

auditors are higher today. Furthermore, the global head of audit at Mazars, David Herbinet,

explains that auditing is “more important than ever”, established on the fact that the complexity

of modern global business and the judgment of their accounts are higher today (Financial times,

2017a). With new emerging extensions that have been developed within auditing, the

legitimacy of the audits in new areas depends on the audit quality. Manita et al. (2020) explain

that the legitimacy will depend on the audit profession’s ability to master new technologies and

evolve audit practices, programs, and offers. This underlines the importance that audit quality

remains high.

From the accounting community’s perspective, audit quality is perceived as two components,

Audit Competence and Auditor-Independence (Ruiz et al. 2004). Ruiz et al. (2004) explain that

the probability of an auditor to discover and report different breaches in the client’s accounts

defines audit quality. However, Duff (2009) state in his article that in order to measure audit

quality in the best possible way, a four-factor model should be applied that distinguishes audit

quality in two parts, technical quality, and service quality. The concept of audit quality can be

conceptualized as a theoretical continuum ranging from very high to very low. In situations

where audit quality is perceived low, consequences can occur, and there will be a high risk for

audit failure (Francis, 2004). Further, Francis (2004) state that audit quality and audit failure

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are related in terms of when audit failure rates are high, the audit quality is perceived low, and

vice versa. When audit failure occurs, it could impose negative consequences as stakeholders’

strategic and investment decisions will be based on incorrect information from the financial

reports.

Throughout history, the auditor’s role has evolved mainly because of audit failures due to

several unavoidable external events. Such as the Enron scandal, increased criminal activities,

rapid technological development, and the financial crisis of 2007–2008. (Duff, 2009; Owolabi

et al. 2016; Albitar et al. 2020; KPMG, 2020b). Events such as these create disruption within

the audit community and put society’s trust in auditors at risk (KPMG, 2020b). Hence, auditors

need to adapt to changes to ensure a high level of audit quality. The ongoing outbreak of Covid-

19 (This study was conducted Spring 2021) could be the latest and toughest external event that

may affect audit engagements and its community (Albitar et al. 2020).

1.1 Research Problem

Most of us are familiar with the current ongoing situation regarding the Covid-19 pandemic

which has a major impact on people’s day-to-day activities (Albitar et al. 2020). The pandemic

creates major negative consequences within most industries and has already had considerable

economic and financial effects worldwide (Goodell, 2020). Furthermore, Goodell (2020) states

that Covid-19 will have a global destructive economic impact. Together with market

uncertainty, these economic turbulences could affect investors’ confidence in companies’

financial performance and could lead to various financial distress (KPMG, 2020d). In times of

uncertainty, there is a great need for reliable information and transparency to regain trust, and

a part of that will be provided through financial reporting. (Deloitte, 2020a; EY, 2020). Hence,

it is important to recognize and identify all of the challenges that audit committees and auditors

face at this point (EY, 2020).

The Chairman of PwC, Bob Mortiz, states that “Auditing is harder than ever during a

pandemic” (Financial Times, 2020b). Mortiz bases the statement on the fact that judging if

companies can continue to operate and if they are free from errors or frauds is challenging as a

consequence of Covid-19. The others in Big Four share the fact that the Covid-19 pandemic

will have a fundamental impact on the audit community. As mentioned earlier, EY (2020)

states that auditors will possess an essential and challenging role during this pandemic. Deloitte

(2020a) writes in their article that they believe that now is the time for the auditor’s role to

evolve and for their profession to meet both the current and emerging needs of stakeholders.

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KPMG agrees with its peers and states that the increasing uncertainty and risk in the current

environment of Covid-19 will have an impact on auditing (KPMG, 2020c).

SIA (2020b) believes that Swedish auditors must now, more than ever, keep hold of their focus

on their ethical and social responsibility. This increases the expectations and pressure from

society on auditors. Hence, auditors need to be ready to re-evaluate the level of threats and

revisit their actions to maintain auditor-independence. (IESBA, 2020). According to SIA

(2020b), auditors need to continue to meet international standards during the pandemic, which

may require more consideration by auditors to use alternative audit procedures to gather

adequate and effective audit evidence.

Furthermore, the European Court of Auditors (ECA) states that the Covid-19 pandemic will

bring unpredicted challenges to auditors within the EU and its members (ECA, 2020). Another

report by the International Federation of Accountants (IFAC) also foresees that the pandemic

will have complex consequences at audit engagement and financial reporting (IFAC, 2020a).

The report further states that there may be challenges for auditors to obtain sufficient audit

evidence to review the company’s management and financial statements regarding the current

situation.

One specific challenge that may occur or increase due to the Covid-19 pandemic is fraud. Bob

Neate, Head of UK audit at Mazars, explains that during the pandemic, some firms will use

this period to make their numbers look more favorable in the future, of which auditors must

consider that risk (Financial times, 2020c). A report from Deloitte (2020b) also states that the

risk of committing fraud may increase due to the pandemic. In the current environment, where

Covid-19 has caused significant financial and operational disruption, increased pressure on the

businesses may increase the opportunity to commit fraud (Deloitte, 2020b). This should be

interpreted as, considering the financial disruption of the economy due to Covid-19 and the

increased risk of fraud, accurate going-concern (GC)-assessments, i.e., do the auditors believe

that the client will continue in its current form with a minimum of a 12-month timeframe should

be more challenging for the management and auditors (Deloitte, 2020c).

The establishment of the different restrictions due to the Covid-19 pandemic is another

challenge that may affect the audit community. The Public Health Agency of Sweden has

during 2020 introduced restrictions and recommendations to employers to reduce the spread of

Covid-19. Some of these restrictions and recommendations consist of (i) encouragement of

remote working, (ii) postpone conferences and business trips or similar events and replace it

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with digital tools, and (iii) allow the employees to have social distancing in meetings, at coffee

breaks and dressing room. (The Public Health Agency of Sweden, 2021). According to KPMG

(2020c), restrictions like these will change how clients and auditors interact with each other.

This could indicate that there will be a change in the auditor-client relationship since auditors

as well as clients must find alternative working methods and new ways to communicate. IFAC

(2020b) states that auditors have to be flexible, alert, and skeptical to maintain high quality.

It is evident, considering recent fact from some of the biggest auditing firms in the world,

independent organizations like ECA, IFAC and IESBA and Swedish authorities like SIA and

The Public Health Agency of Sweden, that the Covid-19 pandemic will bring tough challenges

to the audit community. As the consequences of these challenges and restrictions are yet more

or less unknown, it will be hard to foresee them. This could be interpreted as the risk of audit

failure may increase, meaning that the Covid-19 pandemic may be an external event that will

threaten audit quality in times when auditing is more vital than ever. Questions such as how

Covid-19 will affect audit quality in terms of making accurate GC-assessments, how travel and

meeting restrictions will affect the auditor-client relationship, and auditor-independence are to

our acknowledgment yet unknown. Therefore, we will specifically review how audit quality

will be affected by the Covid-19 pandemic on three aspects: GC-assessments, auditor-client

relationship, and auditor-independence. As the existing research in this area is almost non-

existing, since the pandemic is ongoing, we want to contribute to minimizing this research gap.

This leads us to the following research question:

How do auditors perceive potential effects from Covid-19 on audit quality in terms of going-

concern assessments, auditor-client relationship, and auditor-independence?

1.2 Purpose and Contribution

The purpose of this study is to explore how Covid-19 may affect audit quality but also provide

early insights if the pandemic has already affected audit quality. This is important and relevant

as audit quality should sustain high so that stakeholders can make rational investment decisions

on given information from the financial statements during uncertain times. As this study is

conducted at a point in time where we have not seen the full consequences of the ongoing

pandemic, the results can be seen as an indication for future researchers that beyond the

pandemic seek to explain how the Covid-19 pandemic affected audit quality. There is a limited

amount of research regarding this topic, mainly because the outbreak of Covid-19 started at the

beginning of 2020 and is ongoing. The few studies and reports published within this area are

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convinced that there will be consequences on auditing and audit quality (Albitar et al. 2020;

Goodell, 2020). However, none of these studies has conducted a more elaborated study by

obtaining empirical evidence from authorized auditors to understand the effects of Covid-19

on audit quality. Hence, this paper contributes to the research community by discussing the

auditor’s role as an assurance and transparency provider during turbulent economic times.

Lastly, this study will give insights into the evolution of the audit profession, which can be of

importance for stakeholders, academic researchers, and the audit community.

1.3 Delimitations

In order to compare the collected data from the respondents, they must have a similar

background, experience, and knowledge. Consequently, the respondents will be delimited to

authorized auditors who operate within Big Four auditing firms. The research scope of this

study will be delimited to Sweden as Big Four represent 90% of the market shares (SIA, 2020c).

Hence, the Big Four could also be representative of the perceived general audit quality in

Sweden, which makes Sweden an interesting country to apply this study in. (Svanström, 2015;

SIA, 2020c)

The paper is structured as follows: Section 2 constitutes previous literature where Covid-19

and its impact on auditing will be presented, and audit quality will be studied as a modified

conceptualization. Section 3 highlights the methodological research method and a discussion

about the practical choices that have been made. Section 4 contains the empirical data, and

section 5 the analysis. Finally, Section 6 presents the conclusion with suggestions for further

research.

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2.0 Literature Review

This chapter will present the limited existing research about Covid-19 effects on auditing and

its quality. A more detailed illustration of the term audit quality will be explained. Furthermore,

we will introduce the four-factor model of audit quality which the authors later modify in a

proper way for this study. Follow this, a literature review of GC-assessments, auditor-client

relationship, and auditor-independence will be illustrated. Finally, we will present our model

of analyses where the research phenomena will be conceptualized.

2.1 Covid-19

The existing research of Covid-19:s effect on the economy as well as auditing is limited.

However, Goodell (2020) is one of few researchers that has studied how Covid-19 will affect

society and the economy from a macro perspective. One of the obvious ways a pandemic

impacts the financial systems is by the substantial economic costs. Goodell (2020) anticipates

that some challenges that now are at the forefront of Covid-19 are: loss of employee

productivity, social distancing disrupting economic activity, impact on investments, and costs

to the health systems. More specifically, Goodell (2020) discusses how the impact of Covid-

19 will affect financing and cost of capital and argues that earlier studies illustrate that the cost

of capital will increase during disasters like Covid-19, which will tighten the financial

flexibility. With this in mind, fewer investments will be made, which will negatively affect the

growth of the global economy. The conclusion of Goodell’s (2020, p.4) study is that the

pandemic “is causing a direct global destructive economic impact that is present in every area

of the globe”. As auditing is a central aspect of the economy and the financial systems, it is

easy to argue that auditing and its quality will be affected. Goodell’s (2020) research paper is

relevant for this study since it is one of the few studies that have been made during the pandemic

and gives an overview of the possible consequences of Covid-19 on the financial markets.

Albitar et al. (2020) are, to our acknowledge at this date, the only research paper that studied

the effects of Covid-19 on audit quality. However, they only discussed the theoretical impact

of Covid-19 with a desk study method without empirical evidence. Still, they argue that the

impact of Covid-19 on auditing and its quality is enormous. As Covid-19 will bring

unprecedented challenges and uncertainty, companies may start to manipulate their earnings or

go bankrupt, bringing severe pressure on auditors to provide high-quality information to

stakeholders (Albitar et al. 2020). More specifically, Albitar et al. (2020) argue that Covid-19

will affect and challenge audit quality in five aspects: audit fees, GC-assessments, auditor

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human capital, audit procedures, and audit personnel salaries. They conclude that “the effect

of the Covid-19 pandemic would be the toughest challenge for auditors and their clients since

the 2007-2008 global financial crisis” (Albitar et al. 2020, p.174). They further explain that

their study could be seen as a systematic picture for future researchers and complementary

when providing empirical evidence. Due to the lack of previous research, the study of Albitar

et al. (2020) is highly relevant since it indicates what areas could be affected within audit

quality.

Except for Goodell (2020) and Albitar et al. (2020), scientific articles and research papers are

almost non-existing in the area of Covid-19:s impact on auditing and audit quality. This

illustrates the research gap within this area. However, at the same time, the biggest auditing

firms in the world, i.e., Deloitte, EY, KPMG, and PwC, manifest that the impact of Covid-19

will be significant and impose tough challenges. As the auditing practitioners, i.e., the auditors

within Big Four, are evident in their reports that Covid-19 will cause them trouble, this is an

important research gap to fill. (Deloitte 2020a, 2020b; EY 2020; KPMG 2020a, 2020c, 2020d

and PwC 2020)

Given the importance that the role of auditing possesses, the international federation of

accountants (IFAC) and the financial reporting council (FRC) have conducted guidelines for

auditors on issues that may arise due to Covid-19. The report by IFAC (2020b) states that it

will be necessary for auditors to engage in early timeframe discussions about the audit process

as there will arise issues that have not been encountered earlier. The auditor-client relationship

will also most likely be affected by the restrictions on travel and the recommendations on

remote working, which also supports that the audit engagement between the parties should start

early. Both IFAC (2020b) and FRC (2020) highlight that alternative procedures to collect

sufficient audit evidence is essential as Covid-19 will affect the standard procedures. For

example, restrictions on travel may impact physical access, as the ability to obtain documents,

inventory counts, the test of controls, and the availability to meet client staff will be limited

(IFAC, 2020b). Another vital aspect that auditors must take into consideration due to Covid-

19 is their professional judgment and skepticism. There is a considerable risk that areas in

auditing, such as GC-assessments, accounting estimates such as impairments, fair value, and

judgments, will be challenging for auditors due to Covid-19. Even though little research has

been done in this area, it is clear that practitioners, the biggest auditing firms, and standard-

setters such as IFAC and FRC believe that Covid-19 will impact the audit community.

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2.2 Audit Quality

In order to assess how Covid-19 will affect auditing and its quality, it is essential to underpin

the meaning of the term audit quality. Mansouri et al. (2009) explain that the main objective of

auditing is to achieve high audit quality, and without it, the audit practice is undermined. Even

though much research has been done on audit quality, no universal standard definition exists

and how to measure it (IAASB, 2011). Still, the most common definition of audit quality is

offered by DeAngelo, who defines audit quality as "the market-assessed joint probability that

a given auditor will both (a) discover a breach in the client's accounting system, and (b) report

the breach" (DeAngelo, 1981, p.186). This could be interpreted as the auditor needs a specific

competence to find potential errors of the client and possess apparent independence from the

client to ensure that the auditor reports the error.

As mentioned earlier, audit quality is a term that can vary from low to high, of which audit

failure occurs at the lower end of audit quality (Francis, 2004). Francis (2004) further explains

that audit failure can occur in two different circumstances; (i) when the auditor fails to issue a

qualified or a modified audit report, and (ii) when the auditor does not apply generally accepted

accounting principles, since both of these cases may mislead different stakeholders. On the

other end of audit quality, i.e., high audit quality, will lead to positive effects for stakeholders

and specifically investors. One of Francis's (2004) results claims that high audit quality

positively correlates to earnings quality. Earnings quality is defined as "Higher quality earnings

provide more information about the features of a firm's financial performance that are relevant

to a specific decision made by a specific decision-maker." (Dechow et al. 2010, p.344). This

could be referred to as a greater ability to predict future cash flows only based on the firm's

earnings and no other non-recurring items or other influential aspects (Menicucci, 2020). This

illustrates the importance of audit quality, as higher quality will lead to more straightforward

predictions by different stakeholders as the earning quality will also be high.

2.3 Four-factor model of audit quality

As earlier stated, audit quality is a complex term to define and measure, which has been a

trouble for theorists in many years (Herrbach, 2001). However, the results of Duff's (2009)

study states that using a four-factor model is the best way to measure audit quality. Duff (2009)

divides audit quality into two different elements, (i) technical qualities and (ii) service qualities.

The technical qualities consist of three factors: auditor-competence, auditor-independence, and

the auditor's technical relationship with its auditee. Within these three factors, each one was

included by different dimensions: competence (capability, assurance, and reputation),

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independence (a uni-dimensional factor), and relationship (expertise and experience). The

service quality is itself the fourth factor which includes dimensions as empathy and

responsiveness but could be best described as non-audit services. Duff (2009) used this four-

factor model with a survey data approach to measure audit quality in the UK between 2002-

2005 when the audit environment underwent a significant change due to different reporting

scandals and new regulations such as the Sarbanes-Oxley 2002. The Sarbanes-Oxley Act 2002

could be explained as a new regulation prohibiting auditors from helping clients with certain

non-audit services (Zhang, 2007). One of Duff's (2009) findings was that the technical qualities

got weaker, indicating that the dimensions in the technical qualities fail to sustain high in times

of change. Duff's (2009) research is relevant for this study since it creates a framework of

relevant aspects affected during times of change.

2.4 Modified conceptualization of Audit Quality

Figure 1: Illustration by Johnsson & Persson based on Duff's (2009) four-factor model.

As illustrated in figure 1, the authors have made a modified conceptualization of audit quality

based on Duff’s (2009) four-factor model. Since Service quality is based on non-audit services,

such as advisory services, it will be excluded from this study, as the main focus of this study is

only on the technical audit qualities. The modification of the four-factor model has been made

in a suitable way for this qualitative study. As mentioned in section 2.2, Duff (2009) explain

that technical qualities consist of three factors and one of these is auditor-competence.

Furthermore, Duff (2009) states that the term competence is not easy to observe or measure,

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but competence is connected to assurance which is related to the auditor’s perceptions to detect

errors. Ruiz et al. (2004) complement this by explaining that the auditor’s ability to detect

financial distress and the probability of issuing GC-warning are reflected in the auditor’s level

of competence. Ruiz et al. (2004, p.601) further state that “Identifying a client as a potential

receiver of a GC-warning will depend on the client’s financial health and on the level of auditor

competence needed to detect it”. Hence, it is relevant to focus on GC-assessments when

evaluating auditor-competence. This is the reason why GC-assessments in this study illustrate

auditor-competence. Secondly, the term auditor-client relationship depends on the auditors’

experience and expertise with their clients and the shape of the relationship. Finally, the last

aspect of technical quality is auditor-independence which is an essential factor of audit quality.

As DeAngelo (1981) stated, it is not just about finding the breach; it is equally important to

report it. Without independence, audit quality is questionable (Mansouri et al. 2009). It is

essential to understand that similar to Duff’s four-factor model, even though the factors within

technical quality are distinct from each other, they are still correlated and therefore affect and

depend on each other.

2.5 Going-Concern assessments

As auditing can be perceived as a trust mechanism in society, assessments of GC from auditors

are vital. As auditors each year produce an audit report for their client, they must assess whether

the company is a GC, i.e., do the auditors believe that the client will continue in its current

form with a minimum of a 12-month timeframe (ISA 570, Revised). The standard (ISA 570,

Revised) further explains that if the auditor at any occasion disputes the client’s ability to

survive, they should issue a GC-warning. Initially, it is the management of the client that should

conduct a GC-assessment whereby it is the auditor’s responsibility to collect audit evidence

that is sufficient enough to assess if the management has made correct or incorrect assessment

(ISA 570, Revised). Some events or conditions that may produce a possible GC-warning by

the auditor are listed in ISA 570: the current liability position, inability to amortize loans as

they mature, negative operating profit, substantial low or negative cash flow, loss of a

significant customer are some of these.

GC-assessments are an essential aspect of audit quality, in fact, some studies imply that it could

be seen as a proxy or measurement for audit quality (Francis, 2004; Gros and Worret, 2014).

Francis (2004), whose study review the past 25 years research of audit quality, explains that

one way of determining if audit quality is high or low is to observe investors’ response to GC

reports. If the audit is of high quality, the response by investors from the GC report should be

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extensive since it conveys valuable information. However, if the audit quality is low, a GC-

warning would have little informational value to investors, hence no or minor reactions

(Francis, 2004). Furthermore, Gros and Worret (2014) explain that auditors with a higher

probability to issue a GC-warning of their client can, from an objective point of view, be seen

as more independent and therefore provide higher quality.

Since the assessments by auditors of GC-warnings are vital to audit quality, they must possess

the right skills and experience to be accurate. Furthermore, since it is the management of the

client that firstly conducts a GC-assessment, it is also crucial that the auditor has sufficient

information about the client to agree or disagree with the assessment made by the management

(ISA 70, revised). In Gibbins et al. (2007) study, some interesting findings in terms of

knowledge between the client’s CFO and the auditor were discovered. When the CFO and the

auditor have two different views on an issue, the one party with the highest expertise and

competence goes “winning out” of the discussion. From the CFOs’ point of view, they possess

a higher volume of expertise and skills and can make better analyses of the company. This

shows that it should be necessary for auditors to possess equal competence in the client’s

operations to achieve the ability to stand up to the management in events of disagreement. If

not, it may lead to a worse ability to identify GC problems as the auditor fails to get a bigger

picture of the clients’ financial situations. (Gibbins et al. 2007).

2.5.1 The Complexity of GC-assessments

As previous literature illustrates, the importance of accurate GC-assessments is very high since

the consequences of the auditors’ decisions will have a considerable impact on shareholders

and other stakeholders. However, as the importance is high, the complexity is high. According

to some researchers, GC-assessments are among the most challenging tasks within the audit

work (Louwers et al. 1999; Arnold et al. 2001; Anandarajan et al. 2008). If an auditor conducts

a GC-warning, one could understand the implications and consequences to the shareholders.

However, one could also see the implications to shareholders when the auditor issues a GC-

warning for a company that later after 12 months are sustained strongly, respectively vice versa,

when the auditor does not issue a GC-warning for a company that during the next 12 months

goes illiquid. These two errors are named error type I (False positives) and error type II (False

negatives) (Francis, 2004). Francis (2004) further explains that both of these errors are a type

of audit failure as the audit report contained wrong conclusions.

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An earlier study regarding error type II illustrates that 70% of the bankruptcies were not

preceded by a GC-warning, meaning that only three out of ten were given a correct GC report.

The auditor is not responsible for predicting bankruptcy since other aspects may play a role

that could not be predicted 12 months ago. However, error type II is still viewed as an audit

failure since there is a potential litigation risk for the auditor. Concerning error type I, another

study illustrates that, on average, six out of seven GC reports contain error type I. (Francis,

2004). Francis (2004) interprets this as auditors having a sense of “over issuing” GC-warnings

because of the low cost of error type I relative error type II. As type I can induce some degree

of customer dissatisfaction, type II can achieve higher costs than that, such as litigation.

However, error type I could trigger a wave of events that itself unintentionally pushes the client

into an actual bankruptcy. For example, when the auditor issues an incorrect GC-warning, that

warning itself could lead to lenders not willingly renewing or extending credits, and suppliers

may change their common agreements (Francis, 2004). Another complexity with issuing GC-

warnings, mainly with incorrect ones, i.e., error type I, is the risk of “auditor switching” where

the audit firm may potentially lose their client after an act of a GC-warning (Carcello and Neal,

2003; Humphrey et al. 2009; Louwers, 1998).

2.5.2 Effects of Covid-19

Albitar et al. (2020) and IFAC (2020b) are convinced that significant uncertainties that rise

from the Covid-19 pandemic will make it more difficult for auditors to scrutinize the

management’s assessment of GC reliably. Albitar et al. (2020) argue that many companies will

have a higher business risk due to the increased uncertainties attributable to the lack of liquidity.

Hence, because of the pandemic, we could expect a considerable impact on GC-assessments.

Furthermore, a report published from IFAC (2020c) states that the uncertainty associated with

the pandemic may put pressure on organizations as they will explore avenues to remain as a

GC. Avenues like those may create opportunities for fraudulent and illegal activities as

fraudulent applications for government support, product and benefit fraud, insurance fraud, and

financial statement fraud.

IFAC (2020b) highlights several challenges that auditors may have to consider when evaluating

management’s assessment of the company’s ability to continue as a GC. Firstly, all forecasts

and budgets made previous Covid-19 will most likely require a significant revision since they

are based on stable economic times. There could be changes within the terms of financing

facilities and government support and the rise of future obligations that have to be considered.

Furthermore, auditors have to evaluate to what extent a company relies on government support

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and if that support would cover the short-term liquidity issues. There is also uncertainty

regarding consumer behavior if the same behavior will still apply after the crisis or change.

These complex issues contribute to difficulties when evaluating the degree of business

disruption. Lastly, there is insufficient reliable data regarding the potential length of the

economic downturn. Since forecasts of future cash-flow scenarios are based on assumptions

and not existing reliable data, these estimates will be highly uncertain. (IFAC, 2020b).

2.6 Auditor-Client Relationship

During the last decades, an increased number of regulators, lawmakers, and academic

researchers have paid considerably more attention to the auditor-client relationship

(McCracken et al. 2008; Choi et al. 2012). The Enron scandal and the collapse of the audit firm

Arthur Andersen in 2001 can be seen as a milestone and contributory to the increased focus

and research regarding the auditor-client relationship and its impact on audit quality (Choi et

al. 2012).

2.6.1 The importance of Auditor-Client Relationship

In general, the concept of relationships between two or several parties can be perceived as

complex. Principally, a relationship is always dependent on multiple willingness from the

different parties, and the relationship between the audit partner and their clients is not an

exception. (McCracken et al. 2008). As mentioned earlier, the auditor’s mission is to add

credibility and reduce information asymmetry between the company management and the

shareholders. However, there is also an information asymmetry between the auditor and client

(Rennie et al. 2010). Rennie et al. (2010) state that the members of client management have

significantly more knowledge about their organization compared to the auditor. This indicates

that the auditor is dependent on the degree of cooperation from the client in obtaining

information from the management to carry out the audit. Thus, the auditor has no other choice

but to provide their clients with some degree of trust. (Rennie et al. 2010).

2.6.2 Proactive relationship

McCracken et al. (2008) structure their research by dividing auditor-client relationships into

two different categories, proactive and reactive. Proactive relationships are characterized by

the client’s willingness to have close and continuous communication with the auditor. Within

these proactive relationships, the clients consult with the auditor throughout the year to deal

with potentially contentious issues at an early stage and produce a no-surprises audit. Hence,

proactive relationships are open, and issues are brought to the table. (McCracken et al. 2008).

Furthermore, McCracken et al. (2008) find that auditors define proactive relationships as ideal

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and tend to make active moves to turn reactive relationships into proactive ones. Although

auditors make active moves to change the present reactive relationship to a proactive one, it

will take time for a relationship to mature into a proactive one (McCracken et al. 2008).

According to Johnson et al. (2002), there is a higher risk of a lower audit quality during the

first three years of the relationship. This could partly be explained by Francis’s (2004) study,

who argues that the audit quality may be lower initially for new audit engagements while

auditors acquire knowledge of the client. Furthermore, Duff (2009) conceptualizes this

knowledge about the client in the dimensions of expertise and experience. Expertise is defined

as the possession of relevant specialist knowledge by the auditor, focusing on the client’s

industry. Since McCracken et al. (2008) states that a proactive relationship is more open-

minded, this type of relationship would be more favorable for auditors when seeking expertise

and experience.

Based on the research above, it would be natural for big audit firms to actively act in order to

seek more proactive relationships with their clients. Choi et al. (2012, p.67) support this, whose

conclusion shows “that auditor-client geographic proximity or auditor locality has a positive

impact on audit quality”. Furthermore, this could be an explanation for “why local audits are

so prevalent, and Big Four audit firms have continuously expanded their practicing offices to

cities in which their clients are headquartered” (Choi et al. 2012, p.67). By getting closer to

their clients, auditors within Big Four have a better chance to gather knowledge about client-

specific characteristics. Characteristics such as client incentives, abilities, opportunities for

opportunistic earnings management, and client business risk entails audit risks. When auditors

are closer to their clients, they could develop such knowledge through various ways. Valuable

private information about the client’s firm could easily be obtained by informal talks with the

firm’s executives, employees, suppliers, customers, and competitors. By having local auditors

with proactive relationships, they can more frequently visit client firms and observe their

operations directly at a lower cost. (Choi et al. 2012). Further, Choi et al. (2012) argue that this

kind of social bonding mitigates information asymmetries, enhances monitoring effectiveness,

and benefits audit quality.

2.6.3 Reactive relationships

In relationships identified as reactive ones, the client does not typically consult with the auditor

regarding the appropriate treatment of the regulations. This kind of relationship usually results

in the auditor not identifying issues until late in the audit. This is mainly because the client

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waits until year-end or later to tell the auditor about the issue. (McCracken et al. 2008). Carcello

et al. (1992) state that frequent communications between auditors and management and

frequent visits by the auditor to the client’s office are among the ten highest-rated attributes of

audit quality. Since frequent communications or frequent visits do not characterize reactive

relationships, the auditor will face a challenge in obtaining valuable information. Since there

is a low level of information exchange, it will be more auditors challenging to evaluate their

clients’ characteristics and incentives (Choi et al. 2012). Furthermore, Myers et al. (2003) state

that uncertainty regarding characteristics of the client increases the potential for audit failures

early in the auditor-client relationship.

2.7 Auditor-Independence

There has been a significant amount of previous research on possible impairments of auditor-

independence throughout history. The risk of auditor-independence impairment has also been

a longstanding concern for regulators, legislators, and market participants. (Ettredge et al.

2017). The most fundamental characteristic of auditing is that it will be done from an

independent point of view. As mentioned earlier, Mansouri et al. (2009) clarify that audit

quality is questionable without independence.

As previously mentioned, auditor-independence is correlated with GC-assessments and

auditor-client relationship and, therefore, affects and depends on them (Duff, 2009).

McCracken et al. (2008) discuss the importance regarding the shape of the relationship the

auditor has with the client and that a reactive relationship tends to take time to mature into a

proactive one. Considering that, it is also essential to understand that the length of the

relationship is one of the main factors discussed when evaluating independence. Francis, (2011,

p.134) states that “the auditor’s objectivity might become impaired by a long-term relationship

with a client and provide some support for the argument in Bazerman et al. (1997) that it is

difficult for auditors to be skeptical and objective toward their longstanding clients”.

Furthermore, Rennie et al. (2010) argue that the auditor-client relationship tends to be the factor

that may cause closeness between auditors and their clients. This could increase the risk that

the auditor drops his role as a protector for the shareholders and instead becomes the advocate

of the management of the audited firm (Haynes et al. 1998; Jenkins and Lowe, 1999). In line

with this, Bazerman et al. (1997) argue that auditors tend to be less concerned about inflicting

harm on anonymous stakeholders than on the management of the audited firm. This indicates

that auditor-client relationships could have a significant part within the level of auditor-

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independence and that previous research has shown that there is a difficult balance between

having a proactive relationship and avoiding coming “too” close to their client.

2.7.1 Independence during unstable times

Auditors’ independence tends to be in a greater focus during and after crises that affect the

global economy and society. Humphrey et al. (2009) argue that the perception of the audit

profession all depends on its response to those challenges that arise from the crisis. Ettredge et

al. (2017) examined if auditors would compromise their independence to avoid issuing a GC-

warning to important clients during severe economic conditions. Further, they investigate the

relation between client fee pressure and auditor-independence using auditors’ GC-assessment

as their proxy for auditor-independence. Since a GC-warning could lead to high economic costs

for a client, independence can be viewed as an auditor’s willingness to take a position that

opposes client managers’ wishes, thereby risk losing the client (DeAngelo, 1981). This

indicates that if an auditor issues a GC-warning to their client during an unstable economic

environment, that could lead to even more severe times for the client. The findings in Ettredge

et al. (2017) study shows that during the financial crisis of 2007–2008, auditors were less likely

to issue GC-warnings to clients that exert fee pressure on the auditors. Furthermore, Ettredge

et al. (2017) concluded that auditors tended to avoid issuing GC-warning to essential clients

during the financial crisis. One could argue that it is during unstable economic times that

auditors should be most concerned about possible future client insolvency. It is also during

times like these that GC-assessment would be most beneficial for investors and other

stakeholders. (Ettredge et al. 2017).

2.8 Model of analysis

In the figure below, the research phenomena of this study are conceptualized together with the

analytical model. This study aims to explore how the Covid-19 pandemic may affect audit

quality in three specific aspects. These aspects are GC-assessments, auditor-client relationship,

and auditor-independence. In the figure below, a summarization is presented at each aspect of

what the extensive literature review concluded. It is crucial to understand how Covid-19 may

affect these aspects as the audit quality should sustain high in the audit report so that

stakeholders can make rational investment decisions on given information from the financial

statements. Furthermore, the analytical model is finalized with the audit report and stakeholders

to visualize how the three aspects affect audit quality that will later penetrate the audit report

and finally affect the stakeholders’ investment decisions. This illustrates the importance of this

17

study that stakeholders should be able to make rational investment decisions based on high

audit quality reports even under uncertain times.

Figure 2: Model of analysis (Johnsson & Persson)

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3.0 Method

Within the method chapter, the study's approach to achieving the purpose is described.

Descriptions for the choice of research approach, the method for data collection, and the

selection of respondents are made here.

3.1 Research Design

The purpose of this study was to explore how Covid-19 may affect audit quality and provide

early insights if the pandemic has already affected audit quality. In order to answer our research

question, we decided to apply a qualitative research approach. Bryman & Bell (2015) stated

that qualitative research has its main focus on words with the objective to increase the

understanding and knowledge of the research context by exploring a social phenomenon.

Throughout history, professional auditing has been perceived as a socially constructed and

dynamic phenomenon (Power 1996; Power, 2003; Andon et al. 2015). Hence a qualitative

research method was suitable for this study since it aimed to investigate how authorized

auditors interpret and perceive the potential effects of the current situation. Further, the study

was also based on an abductive approach as it encounter an empirical phenomenon which

existing literature cannot account for. According to Bell et al. (2019), the abductive approach

involves back-and-forth engagements with the social world as an empirical source for

theoretical ideas, and with the literature. The study aimed to explore a new situation to identify

the potential effects on key aspects within audit quality (Saunders et al. 2012). Hence, an

exploratory approach inspired this study. It allowed us to collect qualitative data to identify

new issues and variables that arise from the Covid-19 pandemic (Bryman and Bell, 2015).

More thoroughly, Bell et al. (2019) argue that exploratory approach entails the collection of

qualitative data prior to collection of quantitative data. It is associated with investigations in

which the researcher wants to generate findings that could later be employed in a quantitative

investigation.

It is also essential to recognize that this approach has its limitations as it could be a challenge

to the authors to find suitable theoretical concepts in previous research. Hence, could the

research question the study intended to answer result in ambiguous results (Saunders et al.

2012). The reason for not using an explanatory approach is that one should be aware that the

current situation with the pandemic is ongoing and at an early stage. At this stage, the future is

still uncertain, and therefore it would be challenging to conduct an explanatory study of this

specific situation. An explanatory approach where the purpose is to explain rather than explore

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the effects of Covid-19 on audit quality would be more appropriate in the aftermath of the

pandemic.

3.2 Data Collection

As it is the auditor's responsibility to sustain high quality of the audit, we perceived it logical

to build the study on a qualitative study through interviews with auditors. Bryman and Bell

(2015) explain that when it comes to investigating an individual's understanding of a

phenomenon, as in our case, an auditor tries to understand the potential effects from Covid-19,

a qualitative approach is suitable. Within our study, it was the knowledge and experience from

the auditors that were relevant to gain deep knowledge about the impacts of the Covid-19

pandemic on audit quality. Therefore, the collection of our empirical data consisted of

qualitative interviews.

Further, to collect relevant data for the literature review, we searched for keywords like; audit

quality, Covid-19, Auditor-client relationship, Going-concern assessments, and Auditor-

independence. These keywords were mainly carried out through searches in Scopus, Google

Scholar, Business Source Premier, and Emerald Insight. However, table 1 below illustrates

other reports, organizations, and newspapers where information was gained.

Table 1: Illustration of non-scientific reports

Source Function

Deloitte Global Audit firm

EY Global Audit firm

KPMG Global Audit firm

PwC Global Audit firm

International federation of

accountants (IFAC) Global organization representing the accounting profession

European Court of Auditors (ECA) Independent organization under the European Parliament

Financial reporting council (FRC) Independent organization that monitors the development of

international accounting and auditing standards

International Auditing and

Assurance Standards Board

(IAASB)

International standard-setting board

International Ethics Standards

Board for Accountants (IESBA)

Independent standard-setting board, develops high-quality

ethical standards for professional accountants worldwide.

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Swedish Inspectorate of Auditors (SIA)

Swedish government's expert authority in matters of auditors and audit

The Public Health Agency of

Sweden Swedish state authority that has a national responsibility for

public health issues.

Financial Times One of the world's leading financial magazines

3.3 Interviews

As mentioned earlier, the collection of the primary empirical data was gathered from interviews

in which the shape was semi-structured. Compared to unstructured interviews, a semi-

structured approach allows some flexibility but is still more structured in its shape (Bryman

and Bell, 2015). With a semi-structured approach, it is possible to obtain rich information and

deep understanding from the interviews, which were the main reason why we chose it.

Furthermore, as we conducted interviews with one respondent at a time, a semi-structured

interview employs a blend of open- and closed-ended questions followed up by why or how

questions. This implies that rather than having standardized questions as in a survey, one will

create a dialogue around the topics and lead to totally unforeseen matters. (Adams, 2015). We

used open-ended questions in the interview guide to prevent the respondents from responding

‘yes’ or ‘no’. Instead, we gave them the freedom to express themselves more broadly.

Furthermore, since the approach of this study is of a qualitative and exploratory character,

Saunders et al. (2012) argue that a semi-structured approach is desirable. This allowed the

respondents to express more of their experience to capture as much understanding about the

research phenomenon.

However, there are a few challenges and disadvantages with semi-structured interviews.

Firstly, the approach is time-consuming to set up, conduct, and analyze the interviews properly

as the volume of notes is high and many hours of transcribing. Secondly, the interviewers must

be sensitive, nimble, and intelligent and possess a high knowledge about relevant issues within

the subject. (Adams, 2015).

All of the interviews were conducted digitally through Microsoft Teams considering the times

of the pandemic. Furthermore, the respondents were also located in different cities in Sweden,

making it time inefficient to travel and conduct personal interviews. Personal interviews would

be preferable, however, digital interviews with web cameras are a good substitute. Similar to a

personal interview, we still saw the respondents’ body language and expressions when

performing a digital interview. This gave the interviewers a more profound understanding of

21

where the body language interacts with the respondents’ answers. Furthermore, as Adams

(2015) stated, the reasonable maximum length for semi-structured interviews to prevent fatigue

for both respondent and interviewer is one hour of which this strategy was applied. To prevent

missing vital information from the respondents, we recorded all of the interviews with the

approval from the respondents. Furthermore, the interview guide is provided in the appendix.

3.4 Selection Criteria

Since the purpose of the study was to explore how Covid-19 may affect audit quality and

provide early insights if the pandemic has already affected audit quality, it was most

appropriate to interview those who were most familiar and experienced within that area. We

believed that those with the most experience could in detail identify and compare potential

effects from Covid-19 to similar past events and also have a greater opportunity to predict

future consequences. Hence, we created a criterion of authorized auditors and partners with

more than ten years of experience within the audit profession as respondents in this study.

These criteria were established in order to strengthen and provide solid empirical data.

Choosing only one particular group of respondents allowed us to compare the empirical data

between the respondents.

The respondents for the study were chosen by using a purposive sample combined with a

snowball sample. Purposive sampling was used to select the most relevant respondents and was

likely to yield appropriate and valuable information for the study. (Bell et al. 2019). We also

believed that given the study’s aims and objectives, some authorized auditors are more familiar

with the issue than others (Robinson, 2014). These were the main reasons for adopting this

purposive strategy for this study. Furthermore, a snowball sampling approach was used to

locate relevant sample members that were difficult for us researchers to access (Bell et al.

2019). By using the snowball approach, the authors avoided problems with achieving contact

with new respondents as the first respondents shared their network of auditors. By adopting

this approach, we were allowed to access respondents with deep knowledge and understanding

of the subject.

As mentioned in section 1.3, the respondents were only collected from Big Four since these

firms tend to hire auditors with similar backgrounds and hence to make better comparisons and

conclusions. Furthermore, Big Four dominates the Swedish audit market with 90% of the

market share for public companies. However, a consequence of this choice is that we cannot

generalize the result of this study at non-Big Four firms. Moving forward, the respondents were

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identified through the audit firms’ websites and also LinkedIn. Some of the respondents were

identified and selected since they had published articles at the audit firms’ website that

discussed Covid-19 and its effects, indicating that they had a more profound knowledge

regarding the topic. Further, we asked if they had any potential colleagues or someone else in

their network that matches the criteria regarding knowledge and experience. This resulted in

additional respondents. The table below illustrates the respondents interviewed, including their

title, years of experience, and date of the interview. Finally, two respondents of each firm

(Deloitte, EY, KPMG, PwC) participated in the study, meaning that there is a balance of

representatives from Big Four.

Table 2: Respondents interviewed

Respondent Title Years of experience in the audit industry Date of interview

1 Office manager 21 2021-03-08

2 Partner 27 2021-03-09

3 Partner 33 2021-03-10

4 Partner 27 2021-03-12

5 Senior manager 11 2021-03-16

6 Partner 17 2021-03-17

7 Partner 22 2021-03-22

8 Partner 25 2021-03-29

3.5 Pilot Interview

A pilot interview which could be seen as a small-scale version of the planned interview was

conducted to test and prepare the research design. This kind of pilot interview gave us an

indication if our methods and ideas would work in practice. Mainly by evaluating how well the

theoretical framework and design fits the aim of the study (Yin, 2009). The benefits of

conducting a pilot interview were that we had the opportunity to make valuable adjustments

and revisions in the main study (Kim, 2010). Further, Kim (2010) argues that conducting a

pilot study with clear aims and objectives would promote the trustworthiness of a qualitative

research study. A senior auditor from one of the Big Four participated in the pilot interview.

This gave us insight into how the research topic would be received by the participants involved

and how well they were familiar with the concepts used during the interview. Lastly, the pilot

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interview gave us an indication of what questions were more successful compared to others.

Hence, adjustments could be made to the insufficient questions.

3.6 Analysis

Empirical data gathered from the interviews were transcribed and later used as the basis for the

result and the analysis. Since qualitative research could generate enormous amounts of raw

data, there was a need to handle the inflow of the raw data. Hence we created a coding scheme

to counter that challenge. Given (2008) state that the coding scheme should be seen as a helpful

and recommended tool to assist the researchers in integrating structure and thinking in terms

of cause and impact. This was a way to break down the raw data to identify and label as many

concepts and ideas as possible. By doing this, we were given a better opportunity to identify

relationships. The coding scheme was based on the analysis model and consisted of keywords

and themes linked to each other (Corbin and Strauss, 2008). This gave us a structured way of

analyzing and drawing links between the empirical data and the analysis model. The coding

scheme has been specifically applied to use raw data as citations for each question. Then, we

tried to seek different kinds of keywords and key phrases that recur and relate to each other or

are in a contradiction. Finally, we tried to find holistic patterns and themes representing the

respondents’ experiences and answers for each element in the three different sections from the

different keywords. This is further elaborated in the appendix.

3.7 Method Discussion

One of the criticisms against the qualitative approach is that it is too subjective (Bryman and

Bell, 2015). Furthermore, the authors explain that the findings of the study could be in line with

the researcher’s subjective views and priorities about what is essential and significant.

However, as we wanted to obtain more profound knowledge about our research subject,

quantifying it by numbers was no option. Since we chose interviews as our methodology to

collect empirical data, there exists a risk that the respondents would respond and favorably

present their views. However, to minimize that risk, we conducted relatively open questions to

allow the auditors to express themselves with no room for “locked” answers. This allowed the

respondents to freely discuss the issues without being biased by the authors. Further, to

strengthen the objectivity of the empirical data, the data is presented in quotations together with

the authors’ analysis and interpretations of the respondents’ views. This means that the reader

can do an independent assessment as they follow the respondents’ citations and the authors’

analysis and interpretations.

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3.7.1 Trustworthiness

An alternative approach to assessing the quality of a qualitative approach is to study the report’s

trustworthiness instead of reliability and validity. The authors of this study chose that approach

where trustworthiness is made upon four different sub-criteria: Credibility, Transferability,

Dependability, and Confirmability. (Bryman and Bell. 2015).

Credibility

Internal validity could be seen as equal to credibility, whereby it can be challenging to achieve

when one, by a qualitative approach, studies a social phenomenon. In order to achieve

credibility, while the social phenomenon has multiple realities and truths, the observed reality

must be described in a detailed and complete way (Bryman and Bell. 2015). To strengthen the

credibility of our empirical data, we chose authorized auditors, preferably partners, with a

broad and deep experience, minimum of ten years of auditing. This makes sure that

respondent’s views and opinions are of high credibility.

Transferability

As internal validity could be seen as equal to credibility, external validity could be seen as

equal to transferability (Bryman and Bell, 2015). According to the authors, a thick description

of the data is required to achieve transferability and ensure that the study can be contextualized

in other cases. With a qualitative approach, it could be challenging to generalize the results

since the findings are unique in terms of a particular place and time and specific respondents

(Bryman and Bell, 2015). To maximize the transferability of this study and make it as valid as

possible, we have recorded all the interviews to prevent missing vital information. Furthermore,

the respondents’ anonymity will help them speak freely without thinking of possible factors

that could hurt themselves or the company they represent. Providing the respondents with

anonymity were also a way of decreasing the risk of receiving biased answers, mainly within

the aspect of auditor-independence. As the respondents were only selected from Big Four

which covers about 90% of the Swedish audit market for public companies, the results of this

study can hence be easier to generalize (SIA, 2020c).

Dependability

According to Bryman and Bell (2015), dependability could be seen as a parallel with reliability,

ensuring that complete records and notes are being kept of all phases of the research process.

This interprets that the reader must be comfortable with the accuracy of each step of the study,

e.g., problem formulation, selection of respondents, coding scheme, and analysis decisions

25

(Bryman and Bell, 2015). To ensure that the accuracy of the dependability is high, we have

used peers, i.e., supervisor and opposing master students, that has given us monthly feedback,

which is the best tool to ensure dependability (Bryman and Bell, 2015).

Confirmability

The final aspect of trustworthiness presented by Bryman and Bell (2015) is confirmability

which can be seen as equal to objectivism. The authors further explain that to achieve good

confirmability, the focus must be to ensure that the researchers do not bias the research and act

reasonably when analyzing the results. We have earlier in this chapter explained how to

minimize the bias of the authors. Furthermore, at the end of each interview, the interviewers

made a summary to ensure that the interviewers have perceived the respondents’ answers

correctly.

3.8 Ethical Consideration

In the first contact with potential respondents, we ensured that the aim, purpose, and process

were well presented. We created a clear description of our expectations and how they could

contribute to the study. This was because we wanted to avoid all kinds of misunderstandings

and uncertainty regarding the respondents’ contribution. As mentioned earlier, there have also

been ethical considerations regarding the respondents’ option to receive anonymity. The

respondents were mainly given this to protect them from different factors such as citations that

could hurt their reputation or the company they represent. This is supported by Bryman and

Bell (2015), who argue that researchers should seek to minimize the risk that respondents get

harmed by participating in a study.

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4.0 Empirical Findings

In this chapter, the empirical findings will be presented in thematic order, as follows; GC-

assessments, auditor-client relationship, and auditor-independence. The respondents’

experiences and opinions will be retold together with meaningful citations that encapsulate

their answers.


Pre Covid-19

All of the respondents are clear in their opinions that GC-assessments are an essential task of

audit quality. Respondent 2 (R2) explains that assessing a client’s GC is perhaps the most

important issue as it places enormous demands on their work by assessing whether the

companies can survive the next 12 months. R4 agrees and further explains that sometimes the

clients think that the auditors put too much focus on GC-assessments as the clients think it is

pretty obvious. Nonetheless, R4 means that they want quite a lot of audit evidence to see if

they can survive 12 months ahead. R3 expressed in a good way that the recipient of the financial

statements is of great need to know continued GC.

“It is a matter of course that the stakeholders who read our clients’ financial statements must be able

to rely on that information, above all going-concern” - R3.

R5 and R6 agree with the rest that assessments of GC are important, but the level of importance

depends on the clients’ capability to survive or not. R5 explains that when clients have had a

solid five-year period with good revenues, strong forecast, and good funding, GC-assessments

are not as crucial as they could be if the case were vice-versa. In the consideration if GC-

assessments are a difficult task, almost all of the respondents believed that. However, just as

some respondents explained that the importance of GC depends, it is the same case of

complexity. R3, R5, and R6 mean that the complexity could be almost non-existing if the

clients have outperformed in recent years, and nothing indicates that it will change.

Nevertheless, when the client has performed “normally” or even worse, the degree of

complexity increases. R2 addresses the complexity as:

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“It is a very complex task. That we are in some way considered to be able to assess their market and

different conditions as well as the client’s management, which are specialists in their industry, is

super tough. It is a challenging task to look ahead. We can by definition not look into the future, but

we must go on what we have, and at the same time we must have a professional skepticism and

question the management if they have reasonable assumptions” - R2.

Challenges of Covid-19

There was a great unity from the respondents of whether Covid-19 has affected the assessments

of GC or not. All agreed that the complexity has and will increase as the estimation of their

clients’ continued GC is more challenging. R2’s opinion was entirely clear of the impact by

Covid-19.

“Going-concern assessments have never been as difficult as they are right now under Covid-19” -

R2.

However, almost all of the respondents, R1, R3, R4, R7, and R8, explicitly stated a big

difference between GC-assessments 2020 and the ones 2021. As the Covid-19 pandemic was

established in Sweden around March 2020 with an explosive pace, the respondents explained

that it was almost impossible both for the clients and themselves to make any accurate forecast

12 months ahead. R7 explained that auditors were about to sign different clients’ annual reports

around March and April 2020 when the pandemic exploded in Sweden. To assess GC, the

auditor must assess the client’s financial operations, liquidity, and equity 12 months ahead,

which were impossible at that time, R7 explained. Both R5 and R7 explicitly mentioned that

the auditor and their client must work with different scenarios, where scenario one was the

“worst case scenario” and that you then gradually produce other possible outcomes depending

on how the market reacts to the pandemic. Furthermore, both R2 and R7 addressed a dilemma

during 2020 when assessing the future yourself or calling your client’s CFO asking for future

predictions and forecast:

“I mean, no one could even say what will happen next month, how were we then to assess what will

happen in 12 months ahead?” - R2.

“If you contacted your client’s CFO and asked for a forecast of their GC, the CFO would have hung

up the phone in your ear because it was completely impossible” - R7.

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As almost all of the respondents felt that the biggest challenge of making accurate GC-

assessments during 2020 was the uncertain future which made forecast 12 months ahead of

client’s cash-flow and liquidity hard, one common term of a challenge during 2021 and beyond

were the “new normal”. As all respondents mean that today it is at least possible for their clients

to make forecasts, the challenge for the auditors is to oppose their assumptions. R6 addresses

the challenge in a good way:

“Say that the client has assumed that in June it will gradually return to normal again as more and

more people are vaccinated and that in 2022 everything is as usual, then we as auditors must

challenge that assumption if it is really true, is it is reasonable, how can the company justify such a

position and is there an external source that contradicts?” - R6.

Furthermore, all of the respondents believed that the most vulnerable industries that have been

hit the hardest, i.e., the aviation industry, hotel and restaurant-chains, and retail-chains, provide

significant challenges in predicting long-term customer behavior. R1 puts that specific

challenge in words:

“The long-term perspective is very difficult to see, even as the “new normal” will be. For example, I

am responsible for a couple of restaurants, if the corona were to disappear in the fall thanks to good

vaccination, will people still eat as much to the same extent as before? Or have you got used to

ordering and cooking at home? And this does not just apply to restaurants, will we shop in stores the

same way or more e-commerce? Will we travel the same way or stay more at home?” - R1.

R1, R3, R4, R6, and R7 explain that questions like the ones above are fundamental for their

clients’ management and boards to answer and provide information and documents that

strengthen their assumptions. At the same time, the respondents further mean that the auditing

firms themselves must continue to dispute and possess professional skepticism at their clients’

forecasts and assumptions.

Fraud

Beyond the challenges that have been already displayed, i.e., making 12-month liquidity

forecasts and predicting “new normal”, the respondents enlighten different types of challenges

that have arisen due to Covid-19 that has and will affect GC-assessments. Precisely all of the

respondents except R1 believe that fraud has and will increase during Covid-19 times. R1

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explains that the Swedish tax agency has good control for possible frauds and further means

that they have not internally talked about increased fraud risk. However, the rest of the

respondents mean that they have focused on monitoring the risk and developed new routines.

R2 explains that it exists two different kinds of fraud, easily explained:

“Companies can show that they are doing worse than they actually do to get more subsidies and

support from the state. And in the other way, if you sit in a bad seat, people are people, then there is a

risk that they deliberately fiddle with their capital or accounting “- R2.

R6 further explains that the possibilities for detecting fraud are more challenging in a digital

environment, which is the case due to Covid-19. Three out of the four auditing firms have

conducted the majority of their inventories digital since the pandemic started, whereby

respondents 2-8 explain that it is a good complement short-term. However, it brings more

significant risks of fraud. R6 explains that they introduced three criteria that must be fulfilled

in order to conduct digital inventories:

“1. One must have been at the warehouse before to know what it looks like. 2 It is required that we

still have to independently select samples to carry out a control inventory. 3 we must be able to attend

digitally so that we really see the surroundings with good connection. This resulted in the majority of

all inventories being carried out physically” - R6.

Another aspect that has increased the risk of committing fraud during Covid-19 is the

company’s financial covenants. R6 explains that companies have different loan terms with the

banks, called covenants, and the one toughest for the companies is the leverage ratio. R6 further

explains that you as an auditor cannot sign a “clean” audit report if the covenants are not

fulfilled or renegotiated with the bank. Hence, there is a risk of liberty fiddling with the

accounting. However, R7 further means that for the companies that performed very well during

2020, there is a risk of fraud with the covenants in the opposite way, and its equally important

to review:

“Say you manage your covenants for 2020, so instead of over performing on those key figures 2020,

bunker up instead and move the profits to 2021 because you do not how it will be then, then you

manage the conditions both years” - R7.

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GC-warnings and Error type I & II

Precisely all respondents believe that GC-warnings will increase in the current and following

years as a direct consequence of Covid-19, with the background of companies being financially

distressed as well as an uncertain future. Furthermore, most of the respondents explain that you

as an auditor can warn about the GC in two different ways, either as an enlightenment, that

there exists uncertainty about the future, or as an own segment where you declare significant

uncertainty about your clients continuing GC. Moving forward, R8 explains that they have put

a lot more effort and focus of GC, hence being tougher to make GC-warnings:

“I think it will be trendier to issue warnings, you have woken up a bit, because now there are business

risks that did not exist before, you have been a bit blind due to a very long boom, as the risks that

exist today generally have not existed during a long time” - R8.

Furthermore, the respondents also mean that it has become more complex whether you should

conduct a GC-warning or not. R6 explains that they have spent hours after hours with other

partners to discuss this dilemma. R8 puts it into words why it has become more complex:

“Imagine a scale, at the top it is gold and green forests which makes it an easy assessment, at the

bottom it looks so bad that it also becomes a simple assessment, the most difficult are the ones in the

gray zone in the middle, what is really right or wrong to do? There are a couple of companies there

normally, however, that gray zone has grown tremendously during the pandemic” - R8.

As the unanimous were 100% from the respondents in the matter of increased GC-warnings,

the answers of which error that may be the most frequent was anything else but united. R4, R6,

R7, and R8 believe that error type I will be the most common mistake respectively, R1, R2,

and R5 believes in error type II, R3 declined to answer. The most common argument of error

type I is that, as stated earlier, it will be easier for auditors today to conduct GC-warnings given

the situation. However, R7 addresses another argument as the other also supported:

“I imagine that an auditor is rather safe than sorry as well, there is no auditor who wants to end up in

the situation of writing a clean audit report and then the company collapses in just a few months

ahead” - R7.

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The respondents further develop that if the case above happens, there is a significant risk that

the shareholders feel befooled and hence a litigation risk. Therefore, they believe that this risk

is another aspect that indicates that error type I will be the most frequent. However, those

respondents that believe in error type II explain that, in general, you as an auditor want to avoid

as much as possible writing any unusual in the audit report. Especially now during the

pandemic since different prerequisites can change quickly where a GC-warning can harm the

client more. R1 addresses it as:

“Quite frankly, as an auditor, you want to avoid writing anything “out of normal” in the audit report,

in this case, a warning, because you do not want to sprinkle salt in the wounds or be the factor that

contributes to the snowball getting bigger, i.e., that more and more problems arise for the client after

our warning” - R1.


Pre Covid-19

Before getting deeper into the discussion of auditor-client relationships, it was essential to

pinpoint the respondents' thoughts on what defines an ideal relationship with their clients. The

results show that all the respondents were unanimous about what they think is vital in their

relationship with their clients. The respondents gave an overall definition of an ideal

relationship as keeping frequent contact with the client during the year, where they have

transparent discussions and open dialogue.

"You want an open dialogue and above all a transparent relationship" - R4.

"A good and strong relationship is defined by an ongoing dialogue during the year and a proactive

approach." - R6.

The results show that all the respondents thought it is essential to have a transparent relationship

since the auditor prefers that the client early in the audit process raises a red flag for different

problems and challenges. All the respondents also mentioned that they try to build trust so that

the clients feel confident and are not afraid to share information with the auditor. Further, the

respondents explained that trust and respect are two critical factors, and the clients have to feel

that they can contact the auditor and provide information. It could be that a key person has left

the organization or ask questions regarding government grants, unusual transactions, or

potential investments. R1 explains that this allows the auditor to prepare more and deal with

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challenges at an early stage. R3 mentioned that it is common to discover errors when talking

to clients and not when reviewing documents. Furthermore, R4 explained that you become very

limited as an auditor in those cases where you cannot have an open dialogue. R6 explained

clearly what type of relationship that is preferred:

"I am usually very clear about the type of relationship I want to have with my clients. At the beginning

of the relationship, I explain that I appreciate that way of working and also that there is

transparency." - R6.

All the respondents, value personal contact very highly and argue that it gives a better overview

of how things are going for the client. R2, R4, R5, and R6 all agree that it is essential to be

clear at the beginning of the relationship with a new client in how they would like to work and

what kind of relationship they would like to have.

Challenges of Covid-19

According to all of the respondents, Big Four want to take responsibility for reducing the spread

of Covid-19 and therefore have internal recommendations not to visit certain clients and not be

in the office. Hence, the number of visits and physical meetings with their clients had decreased

dramatically and is almost non-existent when the interviews were conducted. However, a

majority of the respondents were evident in stating that the number of meetings was still the

same as before the pandemic, but now they were held through digital communication channels.

R5 did mention that some clients need more support during these times, and hence they have

more frequent contact with these clients.

However, all of the respondents have seen that the nature and form of the meetings have

changed. R4 mentioned that there are shorter meetings and slightly more efficient working

days, and it is much easier to book meetings with the clients and get in touch with the right

decision-makers in the company. The majority of the respondents mentioned that the meetings

are more structured and a little faster on the agenda. The focus is more direct on the issue

instead of the small social talk. The result of this is that the meetings have become much more

time efficient.

All of the respondents also thought the majority of their clients had a remarkable ability to

adapt and handle digital communication. Most of the respondents mentioned that they had

already come a long way in digitization even before the pandemic struck and that Big Four

have good routines regarding mastering the challenge of digital communication. R4 and R6

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also said that for those clients who have a bit of a struggle with digitalization, they offer their

tools to the clients to make the process as smooth and efficient as possible.

"Covid-19 has resulted in that both we as an agency and our clients have realized new opportunities

in being more effective in the communication" - R6.

Furthermore, all of the respondents thought that there was a significant difference between how

the relationship to existing clients has been affected compared to new clients acquired during

Covid-19. According to R7, there has been a robust increase in efficiency but at the expense of

the relationship to the client. Based on this, R7 thinks that what they are doing is entirely

devastating:

"If you have had a relationship with a client for about ten years, it is not that difficult to maintain the

relationship. But new client relationships take an eternity to build if you are to do it digitally." - R7.

R6 explains the challenges more thoroughly. When it comes to new clients, it is challenging to

feel the situation. Further, R6 explains that the situation has made them realize how much they

interpret information through body language. How many signals they pick up when having a

personal meeting, such as how the client changes tone and receives different messages, it is

very difficult to capture these signals via digital meetings. It works for a short period, but it

would be very challenging if it becomes permanent. R8 agrees with R6 and thinks that meeting

restrictions disturb the relationship with existing clients and that the auditor loses a perspective

on what is going on this year. R8 explains that the damage does not only happen because they

have worked digitally for a year, but the damage also grows over time because they, as auditors,

will lose knowledge about their clients' business as time goes on.

Not being at place

The difference that all auditors thought was the biggest challenge was not being able to be at

place and get an overall feeling for clients' operations. All respondents agreed that meeting

employees at place provides extra information about the company. R4 explained that there is a

risk that the auditor does not receive the type of information that could be of high importance.

It is not about the client wanting to withhold that type of information, but more that they do not

think about it themselves. R4 thinks this is a difficult challenge and will undoubtedly mean that

you do not encounter these issues as early as before. Further, R4 explains that when the auditor

is at place, it is also easier to get in touch with other people who could provide valuable

information, such as salespeople who are aware of revenue streams.

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"To be at place and see the customer's business, is a critical aspect”. - R5

R2 thought that being at place is an essential part of understanding the business as a whole.

The auditor must understand their clients' businesses. Just having a coffee and meeting an

employee can add some information about the company. This was also something that all of

the respondents mentioned: meetings at the coffee machines are an essential source of

information for the auditor. R7 said that it is at the coffee machines that you meet people you

do not usually meet. These informal meetings provide valuable information and being in place

creates an added value for the auditor. R8 also sees the increased risks that during the pandemic,

it is difficult to picture the client's activities because they cannot be in place with the client.

This opens up a more significant risk of fraud and unintentional errors and that the auditor

misses these kinds of issues.

"There is a lot to learn through the informal conversations at the coffee machine. The digital meeting

is great, but the physical meeting is even better." - R5.

"There is an added value in being at place. Unfortunately, you lose that part. A personal meeting is

unbeatable." - R3.

The importance of the office

All respondents agree that there is certainly an ongoing debate within the Big Four about the

importance of offices during these times but that it was also a relevant discussion even before

Covid-19. R4 said that there had been a trend among Big Four to reduce the number of offices

in general even before the pandemic to decrease costs and increase efficiency. Furthermore,

R3 explains that it has turned out that it is possible to work remotely and digitally, so it may be

the case in the future that the agencies cut down on local offices and start a "large office" that

revises most of the work. As all respondents are aware of the discussion, everyone is also clear

that if the agencies cut down the number of offices, it must be done with caution. R5 does not

think that digital meetings and a “large office” will completely replace physical meetings in

the future. This is mainly since Big Four will still strive for physical contact because the

agencies aim to build strong relationships with their clients.

"Clients want personal contact, so the offices play an important part in that." - R5.

"Closeness means a lot to many clients." - R4.

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R1 explains that it is essential that you remain close to your clients and that it would be a

mistake to cut down on offices. R3 is also on the same line, and think it is crucial in the future

that the responsible auditor is locally located as the face outwards. At the same time, R3 also

thinks that much of the work can be done in other places and not necessarily from local offices.

R4 entirely agrees with R3 by stating that some auditors must be located close to the client

because the client must have the opportunity to meet their responsible auditor at any time.

Nevertheless, R4 is completely convinced that the teams they have will consist of auditors from

all different parts of Sweden. R8 thought that cutting down on offices and keep working from

home or at a "large office" would lead to them getting further away from their clients, and it

will have a negative impact on audit quality.


Importance of auditor-independence

The results show that all the respondents thought auditor-independence is one of the most

critical aspects of the audit profession. R4 defined it as if the auditor’s independence is

questioned, one has already gone the wrong direction. However, only R1, R2, R5, and R6

thought auditor-independence was especially important during uncertain times, especially

regarding GC-assessments. R6 explained that it becomes even more critical in uncertain times

like these that you dare to challenge the management’s assessments and estimates.

“Now, it is important to have integrity and also stand up for your opinions and thoughts. The

independence is really tested properly” - R2.

R3, R4, R7, and R8 pinpointed that auditor-independence is always essential no matter what.

R4 explained that if the independence would be questioned, you as an auditor and agency will

become uninteresting in the market, resulting in losing all the agency’s clients. This makes it

relatively easy to stay independent in cases where the client threatens to change auditors.

“It is always important, no matter what time we are in. It is one of the most important cornerstones of

our work.” - R3.

Pressure from clients

R5 said that it could possibly be that auditors experience a higher level of pressure during

unstable times. R1 mentioned that there had been situations before Covid-19 where the client

has issued threats to replace R1 as an auditor if R1 would comment on a certain part, e.g., the

36

firm’s GC. R7 explained that if you end up in tough discussions where the client exerts

pressure, it affects independence, where you may have to ask yourself the question of whether

to leave the client:

“Of course, we have ended up in pressured discussions, but then it is important that you stand up for

yourself with your high integrity.” - R7.

However, all the respondents mentioned a difference in the strength to withstand the pressure

from clients between the Big Four compared to smaller audit firms because of the broad client

base. R4 mentioned that the Big Four are strong and can afford to be independent compared to

smaller agencies. Clients are super important, but an individual client may not be as important

for Big Four compared to smaller auditing firms. R5 is also on the same line and mentioned

that there is a higher risk that smaller agencies may face clients who will threaten to change

auditors since they are more dependent on individual clients. R8 was very clear in his statement

that if they had a client who does not agree with their assessment or would force the auditor

not to write something in the audit report, that client is not worth having. R8 thought that there

would only be positive outcomes by leaving such a type of client.

“We are not so dependent on individual clients, we have more client requests than we can handle.”

- R4.

Effects from Covid-19

R1, R4, R5, R6, and R8 mentioned that there are indications that due to non-existent physical

meetings, auditors have distanced themselves from their clients. Further, these respondents said

that this could indicate that it will be easier to make tough decisions. However, R8 also added

that in some cases, it could also be easier to make tough decisions for clients with whom you

have a close and good dialogue. R5 explained that since the auditors do not go to as many

lunches with their clients and do not have any marketing activities, there will not be any risk

that they develop some form of more profound friendship. R5 further explains that it has

become a bit more formal and not as much about building relationships. However, R5 also

added that auditors in the Big Four have strong integrity and are very good at differentiating

between the social and the professional.

R6 and R7 mentioned that new issues and situations arise for the clients during these times. R7

mentioned that auditors want to help their clients, and in a situation like the Covid-19

37

pandemic, when there is much pressure, the auditor can feel personally committed to the client.

At this point, the auditor starts entering areas that an auditor should not be close to. R6 also

recognized this risk which could threaten the auditor’s independence if performing services

such as advice that are not compatible with the role as an auditor. R7 mentioned that the auditor

should always be there and support their clients but must be careful not to take over their

problems and responsibilities. On that theme, R7 believes that the pandemic may have

contributed to situations that increase the risk of entering assignments that an auditor should

not enter. Further, R7 believes that this is certainly something that has occurred in the industry

as a whole:

“Although you see a lot of new smart services that you could deliver, you should also be careful about

making money from a pandemic.” - R7.

4.4 Empirical reference-model

Figure 3: Empirical reference-model (Johnsson & Persson)

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5.0 Analysis

In this section, the empirical findings will be deeper analyzed and compared to the literature

review with the model of analysis as framework.


As auditing can be perceived as a trust mechanism where the results from auditors GC-

assessments are a prerequisite from stakeholders, the quality of those assessments must be

sustained at a high level even during uncertain times. However, the results of this study indicate

that the Covid-19 pandemic has and will affect the conditions for auditors to make accurate

GC-assessments as the respondents have experienced an increase in complexity. A more

specific and interesting result was that the majority of the respondents addressed the complexity

that the pandemic caused in 2020 were different compared to the challenges that exist in 2021

and beyond. As the standard ISA 570 (revised) illustrates, the management should conduct

forecasts with a minimum of a 12-month timeframe assessing the company’s liquidity, of

which the results of this study imply that those kinds of forecasts were quite impossible during

2020. Hence, as the respondents expressed, it was complicated for an auditor to review and

make their assessments of their clients GC. This is quite interesting since the results from

Gibbins et al. (2007) study states that the one-party between the auditor and the client’s CFO

with the most knowledge and expertise about the client’s operations goes winning out of a

discussion. Suddenly, as the situation was during 2020, no party knew anything about how it

will be from 12 months ahead. This is in line with what Albitar et al. (2020) and IFAC (2020b)

addressed, that significant uncertainties that arise from the Covid-19 pandemic will make it

more difficult for auditors to review the management’s assessments of GC reliably.

Since the cornerstone within GC-assessments is to ensure whether the client can continue 12

months ahead in its current form whereof those assessments are based on liquidity forecasts,

that were not possible during 2020, one can genuinely see the complexity whereby much

indicates that the accuracy of those assessments was insufficient. Furthermore, the results

shows that the lesson that could be learned within this issue, is instead of trying to predict 12

months ahead at best of knowledge, the management as well as auditors should make scenario-

analyses. This means that one has hedged oneself to different scenarios in how the pandemic

may develop, of which one has a plan for a continued GC within each scenario.

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However, as earlier mentioned, the results indicate that the challenges that occur now (2021)

due to Covid-19 differ compared to those in 2020. As the results show, predicting future

customer behavior that later settles as the “new normal” is the biggest challenge, where auditors

must obtain a professional skepticism and dispute their clients’ alleged assumptions. This is in

line with the predictions from IFAC’s (2020b) report that there is an uncertainty if the same

behavior will still apply after the crisis or if it will change. This will contribute to more

difficulties when evaluating the degree of business disruption. The complexity of this is

fascinating, especially in the vulnerable industries that suffer from “crowd restrictions”, that

the management of those companies may put pressure on their assumptions, that the “normal”

will return soon when the vaccination is established. However, as mentioned before, it is

impossible to predict future customer behavior, meaning that it will be complex for auditors to

dispute or accept their clients’ predictions. Think of a scenario when a client’s continuing GC

depends on their assumptions that within the near future, their liquidity will increase

tremendous as the restriction will diminish and the society will go back to normal. This puts a

considerable amount of pressure on the auditor to either dispute or accept that type of

assumption, where the decision can have a devastating effect. To summarize, the challenges

that exist today are not as urgent as they were at the beginning of 2020 as now one can make

fairly forecasts. However, the results still indicate that making accurate GC-assessments will

be more challenging, due to the unknown “new normal”.

Just as IFAC (2020c) stated, the result indicates that incentives for fraud have increased due to

Covid-19 as companies in general are more financially distressed. Companies, especially those

in vulnerable industries, try to find avenues to remain as GC, for example, fiddle with

accounting to fulfill the financial covenants. Unlike the challenges described before, the risk

of fraud has always existed, but due to the digital environment, the results indicate that fraud

will be harder to detect, for example digital inventories. This implies that as the risk of

committing fraud has increased as well as detecting fraud has decreased, it is essential for

auditors to review this risk as various frauds can affect the outcome of the accuracy in GC-

assessments and in the end, audit quality.

Since all the respondents believed in an increase of GC-warnings as well as the decision of

conducting a warning or not has become more complex, it indicates that more errors and

mistakes may increase. As GC-warnings may increase and become trendier, as the results

indicate, the most frequent error should be type I. Still, three out of eight of the respondents

40

believed in error type II as they believed that auditors in general would avoid conducting GC-

warnings as it can harm their client more given the situation. This is in line with the results of

Francis’s (2004) study that the warning itself can be the one factor that puts the client in

bankruptcy. The results also indicate with the findings of Carcello and Neal (2003), Humprhey

et al. (2009), and Louwers (1998), that issuing a GC-warning may potentially lead to “auditor

switching”, i.e., losing their client, whereby you do not conduct a warning. However, four out

of eight respondents believe that error type I will be the most frequent, with the arguments of

conducting GC-warnings will be trendier given the situation, but also to protect themselves

from a potential litigations risk. This is also in line with the result from Francis’s (2004) study,

that the cost of error type I is lower relative to error type II, hence one should rather “over

issuing” than “under issuing” GC-warnings. As the results are mixed, it illustrates the

complexity of how Covid-19 may affect GC-warnings. Still, to provide high audit quality, it is

essential to conduct accurate GC-assessments following accurate GC-warnings. However, the

results strongly indicate that it will be more challenging to be accurate than pre-Covid-19.


The results from this study are very consistent with previous research on what characterizes a

good and bad relationship. The respondents gave an overall definition of an ideal relationship

as keeping frequent contact with the client during the year. Hence, the ideal auditor-client

relationship is characterized by transparent discussions and open dialogue. This is in line with

McCracken et al. (2008) which state that the ideal relationship is proactive and is characterized

by the client's willingness to have close and continuous communication with the auditor.

Furthermore, the results show that frequent communication and visits are essential aspects

contributing to a better opportunity to perform high audit quality. These results are in line with

the findings in Carcello et al. (1992).

However, the results also show that the number of visits and physical meetings with clients has

decreased dramatically and is almost non-existent due to Covid-19. That would mean that one

of the highest-rated attributes of audit quality has been lost. Since the number of visits and

physical meetings is non-existent, this could indicate a lower level of information exchange.

This will make it more difficult for auditors to evaluate their clients' characteristics and

incentives (Choi et al. 2012). Hence, that could indicate that the existing proactive relationships

are changing into more reactive ones and a higher risk of audit failure. However, the results

also show that the number of meetings is still the same but has been replaced by digital

41

meetings. This means that there is still frequent communication between the auditors and the

client. The clients' good ability to adapt and handle digital communication also mitigates the

challenge of the transition from physical to digital meetings.

Furthermore, the results show that not being able to visit the client also makes it more difficult

for the auditor to understand the business and gather valuable information. Mainly because

they do not meet the employees within the organization. This is in line with Choi et al. (2012),

who argues that valuable information about the client's firm could easily be obtained by

informal talks with the firm's executives, employees, suppliers, and customers. The informal

talks by the coffee machine are an essential source of information for the auditor. If these talks

and meetings do not happen, it will be a more significant challenge and will probably mean

that the auditor does not encounter issues as early as before. Hence, the auditor does not have

the opportunity to mitigate information asymmetries and enhance monitoring effectiveness

through social bonding. Myers et al. (2003) argue that uncertainty regarding the client's

characteristics increases the potential for audit failures. That could be the case since it is more

difficult for auditors to understand the business during Covid-19.

Furthermore, the results also indicated a difference between existing and new clients and how

they are affected. In those cases where the auditor already has well-established expertise and

experience, the risk of audit failure due to the non-existing visits is much lower. This could be

explained by Johnson et al. (2002) and Francis (2004), who found a higher risk of a lower audit

quality during the first three years of the relationship. Further, the results show that it is not

that difficult to maintain mature relationships through digital communication. This means that

those auditor-client relationships that have been established several years ago are not that

affected compared to newly created relationships.

Similar to previous literature, the results show that clients want personal contact, so the offices

play an essential part. However, Choi et al. (2012) stated that Big Four have continuously

expanded their practicing offices to cities where their clients are headquartered. This is not

entirely in line with the results from this study since it showed a trend among Big Four to

reduce the number of offices in general. Despite these differences, the result and Choi et al.

(2012) are still partly in line regarding the specific finding that the auditor need to remain close

to the client. During Covid-19, it has turned out that it is possible to work remotely and

digitally, so it may be the case that the agencies will cut down on local offices in the future.

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The result of this study and previous literature agrees that if these decisions are made too

quickly and are not necessarily elaborated, the relationship with the client may suffer and thus

audit quality.


The result showed without doubt that auditor-independence is one of the most essential aspects,

which is in line with Mansouri et al. (2009). Hence, there is strong support for the statement in

Mansouri et al. (2009) that audit quality is questionable without independence.

The result in this study indicated that due to the non-existent meetings with clients, auditors

had distanced themselves, and hence it is easier to make tough decisions. This could partly

support Rennie et al. (2010) since they argue that a tight auditor-client relationship tends to be

the factor that may cause closeness between auditors and their clients. Haynes et al. (1998) and

Jenkins and Lowe (1999) argued that closeness could lead to the auditor dropping the role as a

protector for the shareholders and instead of becoming the advocate of the management of the

audited firm. However, this is not in line with the result since it shows that auditors in Big Four

have strong integrity and are good at distinguishing between the social and the professional

parts of a relationship. Still, one should be aware of that this result could be biased since the

respondents probably would not confess that there would exist a risk of dropping the role as a

protector. The result also shows that there is still an increased risk that the pandemic has

contributed to new issues and situations which could put the auditor in difficult positions.

Situations like those may cause the auditor to feel personally committed to the client.

Furthermore, in those situations where the auditor would feel personally committed to the

client, there could be an increased risk that the independence would be impaired. As mentioned

in the analysis of GC-assessments, there are some indications that auditors in general will avoid

conducting GC-warnings as it can harm their client more, given the situation. This result gives

some support for the findings in Ettredge et al. (2017) study. However, Ettredge et al. (2017)

do not find any significant difference between Big Four firms and non–Big Four firms. The

results from this study are contradictory since it indicates that because Big Four has a solid and

broad client base, individual clients are not in a position where they can exert pressure and

threats. This indicate that auditor-independence is still strong within the Big Four during

Covid-19. Hence, that would indicate no significant impact on auditor-independence and in the

end, audit quality.

43

6.0 Conclusion and Discussion

Our purpose was to explore how Covid-19 may affect audit quality and provide early insights

if the pandemic has already affected audit quality. The findings of this study indicate that the

Covid-19 pandemic had various effects on the aspects that constitute audit quality, i.e., GC-

assessments, auditor-client relationship, and auditor-independence. The biggest threat to

sustain high audit quality is GC-assessments as the pandemic has deteriorated the conditions

for making accurate assessments. As (i) more GC-warnings will be conducted for the

companies in vulnerable industries, (ii) more companies are placed in the “grey zone” of

whether the auditor should conduct a GC-warning or not, (iii) 12-months forecasts were not

possible to conduct during 2020, and (iiii) assessing the “new normal” in the nearest future is

rather complex. All of these aspects have emerged due to Covid-19 that will lead to less

accurate GC-assessments. Less accurate GC-assessments will constitute more errors where the

findings illustrated mixed results of the frequency of error type I & II. This indicates that

auditors will either “over-issuing” or “under-issuing” GC-warnings. Hence, the auditor’s

ability to ensure accurate GC-assessments has and will decrease. Consequently, stakeholders

cannot trust those assessments at the same level as pre-Covid-19, indicating that audit quality

may decrease. Hence, this study contributes with the fact that auditors must increase their focus

of GC as stakeholders should require greater disclosure of those.

In contrast, the findings illustrate that the auditor-client relationship has not been equally

affected. Even tough auditors have lost a crucial aspect of the added value by being in place,

the restrictions from the pandemic will result in auditors having less knowledge about their

clients in the long-term, and it is significantly more challenging to build new proactive

relationships digitally, audit quality has not deceased. This is mainly due to (i) digital meetings

work well, (ii) there are the same number of meetings, (iii) the clients are well adapted, and

above all, (iiii) it is possible to maintain a proactive relationship. Although the communication

channels and the nature of the meetings have changed, the relationships remain the same and

thus, no significant effect on audit quality has been observed. However, if the Big Four were

to succeed in gathering and mastering all the positive aspects of digital development that

Covid-19 has accelerated, it would mean a much better opportunity for auditors to produce

higher audit quality in the future. Hence, this study contributes with the fact that digital

meetings should be seen as a complement rather than a substitute for physical meetings in the

future.

44

The findings also show that since the auditor and the client are more distanced from each other,

it would be easier for the auditor to make tougher decisions, which would mean fewer cases

where the auditor’s independence would be questioned. However, during unstable times like

Covid-19, the risk increases that (i) clients will make threats to change auditor in cases where

the auditor would choose to remark on, for example, the client’s GC (ii) the risk that an auditor

feels more personally involved and forced to help the clients (iii) auditor taking on assignments

that could be considered outside the auditor’s area of responsibility. However, the study

indicates that these risks would probably be more significant among non-Big Four firms

because they are more dependent on their individual clients than Big Four. Even though more

situations are created where independence could be threatened, this study indicates that

independence is strong among Big Four and that Covid-19 has no significant impact on auditor-

independence and thus no effect on audit quality. Lastly, this study contributes by identifying

potential factors that could diminish the auditor-independence due to the Covid-19 pandemic.

To summarize, the Covid-19 pandemic has had fewer effects on audit quality than experts and

researchers predicted, as some of them anticipated that the Covid-19 pandemic would bring the

most demanding challenges for auditors since the financial crisis 2008/2009. However, the

findings of this study still indicate that non-accurate GC-assessments are the greatest threat to

audit quality. Hence, we believe that a considerable focus and perhaps, a reform of the GC

procedure, will occur. Down below are the major changes we expect to see within GC-

assessments:

Greater disclosure by management about GC-assessments in the annual reports.

Conducting scenario-analysis instead of a 12-month forecast.

Greater responsibility from auditors at GC-assessments.

Greater responsibility from auditors at fraud.

6.1 Suggestions for future research

As stated in our purpose and method, this study is of an exploratory approach, where the

findings of this report provide early insights and indications of how Covid-19 will affect audit

quality with a qualitative approach. Hence, we suggest that within a timeframe of 3-5 years,

when the pandemic has hopefully ceased and the complete consequences from the pandemic

have been revealed, one should conduct quantitative research of measuring effects at audit

quality. For example, how accurate GC-assessment was post-Covid-19 versus pre-Covid-19

where the findings in this study can be used as indications. It could also be interesting to

45

examine within the same timeframe how the pandemic affected auditing fees, if for example,

the cost of auditing has increased or decreased relative to audit quality.

46

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Appendix

Interview Guide

As the theoretical reference frame illustrated, three main aspects forms audit quality, i.e., GC-

assessments, Auditor-client relationship, and Auditor-independence. Accordingly, these three

aspects will constitute the interview guide. The first section of the interview guide (question 1-

3) starts with background questions about which role they possess and experience within

auditing. Further, the following section handles GC-assessments (questions 4-12). The first

questions, 4 and 5, address if they believe GC is essential and agree with prior research, stating

it is one of the most complex areas in auditing. After introducing the topic, question 6 is quite

a broad question where the authors will discuss with the respondent how Covid-19 will affect

GC-assessments. Further, questions 7 and 8 handle information and knowledge about the client,

which is a crucial aspect to make accurate GC-assessments and if that has been affected due to

Covid-19. Questions 9-12 are more specific ones with different targets within GC-assessments.

Question 9 is about if the risk of fraud will increase and how it will affect the GC process if

that is the case. Question 10 focuses on how the uncertain future will affect the GC-assessments

concerning historical information. Finally, Question 11 and 12 tries to provide if the auditors

believe that GC-warnings will increase due to Covid-19 and if error I (when an auditor issues

a GC-warning to a client that subsequently does not go bankrupt) or error II (when an auditor

do not issue a GC-warning to a client that later goes bankrupt) will be the most common.

The third section addresses questions linked to the auditor-client relationship. The first two

questions, 13-14, give an overview of the respondents' thoughts on the auditor-client

relationship. This is important in order to compare previous research with the respondents'

thoughts of an ideal relationship. Further questions 15-18 focuses on the consequences of

meeting and travel restrictions. The last questions within this theme, 19-21, focus on

communication and trust challenges when searching for valuable information. The last section

consists of questions related to auditor-independence. The first questions, 22-24, focus on the

role auditor-independence possesses during Covid-19 and what challenges auditors will face.

The last questions, 25-26, addressed how the restrictions have had a positive, negative or

neutral impact on auditor-independence.

55

Background

1. Name?

2. Number of years of experience in the auditing profession?

3. Current position and/or title?

Theme 1: Going- concern assessments

4. Do you consider GC-assessments as an important part of the audit? Why/Why not?

5. Do you consider GC-assessments as a difficult task? Why/Why not?

6. Do you believe GC-assessments may be/is more difficult due to Covid-19? Why/Why not?

7. Do you believe that you always have enough knowledge and information about the client

and its operations to make a proper going concern assessment? Why/Why not?

8. Do you believe it will be/is harder to get sufficient information about the client due to Covid-

19? Why/Why not?

9. Do you believe that more companies will commit fraud or earnings-management due to

Covid-19? (Financial-stress due to Covid-19?) Why/Why not?

9a. If yes: How will that affect your audit-process in times of GC-assessments? More

resources? More time?

10. To what extent do you consider historical information compared to a company’s future

plans during the going concern assessment?

a) Has this changed due to the Covid-19? Why/Why not?

11. Do you believe that GC-warnings/opinions will increase the following year/years due to

Covid-19?

56

12. Which error (Type I or II) do you believe will occur more than the other due to Covid-19?

Why?

Theme 2: Auditor-client relationship

13. What do you think characterizes and defines an ideal relationship with your clients?

14. With the term audit quality in mind, how important is the personal contact with your clients?

15. Has the number of visits to clients decreased during Covid-19? How often was it before

Covid-19 and how many are there now?

16. Do you manage to get an overall feeling from the whole company when you can not be at

place and talk to employees, etc.?

17. How important is it from your perspective to meet different types of people in the

organization?

18. All of the Big Four has a relatively strong office network in Sweden in order to come close

to their clients. How do you think the strength of the office's presence has been affected by the

restrictions imposed by Covid-19?

19. Has there been any change in the process of obtaining information from your clients during

Covid-19?

20. Previous research mentions that there is information asymmetry between auditors and

clients. This means that the auditor must to some extent trust the client. Has the trust in the

client changed? Have you as an auditor felt that you had to transfer more trust to your clients

during Covid-19?

21. How good is the clients' ability to handle digital communication? Do these meetings run

less or more often than before Covid-19?

57

Theme 3: Auditor-independence

22. Do you experience that independence is an important aspect during uncertain times as now?

Why/Why not?

23. Are there any auditor-independence issues that have arisen with respect to Covid-19?

24. Has the challenge of staying objective and independent become easier or more difficult

during Covid-19?

25. Do you think that changes in the relationship and the number of physical meetings with the

clients due to restrictions have had any impact on your independence?

25b: Has your independence to your client become higher due to travel and meeting restrictions

as well as work from home recommendations?

26. Is there anything that you want to add regarding the subject, that we have not discussed so

far?

58

Coding-scheme In the figure below, a short description is presented of how we have analyzed the answers given

by the respondents. We have chosen to illustrate the coding-scheme in this way rather than

insert the actual analysis since that would be tremendously extensive. Instead, the authors want

to explain the approach with a description that conceptualizes the procedure. However, an

example is illustrated below for questions 5 and 16-17 with some of the respondents' opinions

to show how the authors have analyzed the transcriptions.

Aspects Empirical data Key words/phrases Themes

In this box the three

different aspects

are applied, i.e.,

either Going-

concern

assessments,

Auditor-client

relationship, or

auditor-

independence.

In this box different

answers from the

respondents are

inserted as citations.

We have chosen

answers from each

respondent that

represent their views of

each question.

Here we try to find

different

words/phrases that

either relate or

contradict to each

other. The reason for

this is to become

easier to analyze the

empirical data.

From the different

keywords we try to

seek different

themes and patterns

that arise within the

different areas of

each aspect. This

will give us an

overview of what

the different

respondents feel in

total of each

aspect.

GC-assessments

Question 5

“Yes I think so, different

types of industries and

companies have and will go

very badly and at the same

time does not know what it

will be like in the future.

The uncertainty about the

future will make it difficult

for us auditors.” - R1

“Just as the situation is, it

has never been so difficult. I

mean, no one can even say

what will happen next

month, how are we then to

assess what will happen in

12 months ahead?” - R2

“Extremely much more

difficult now, as the future

is very uncertain. You want

the companies to be careful

in their assumptions, almost that they should take into

account a worst-case

Uncertain future

Companies has/may be financial distressed

Difficult assessing future

Important to be careful in

your assessments

More complex

assessing the client´s

GC due to uncertain

future

59

scenario than that you are

far too optimistic. - R6”

Auditor-client

relationship

Question 16-17

“You hear and pick up things, to hear what kind of

order there is on the firm.

Much better to be at place”

- R1

“It is very important that

you as an auditor

understand businesses. Just

having a coffee and meeting

an employee can add some

information about the

company” - R2

"It means a lot not to be

able to be at place. Meeting

people at the client's

headquarter provides extra

information about the

company. You hear things

and pick up things that can

be useful in our audit when

we need to identify risks

and the risk of errors." - R3 “There is an added value in

being at place and getting

an overall feeling of the

client's business” - R5

“For me, it is very important to be out with the

client because I talk to a lot

more people then compared

to now. Many people you

meet at the client's place

could contribute with very

useful knowledge and

information that could be

useful for me as auditor” -

R7

Business understanding

Informal meetings

Valuable information

Value adding

Auditor-independence Question 22-23

“Then I think the Big Four

are so strong that they can

afford to be independent

compared to smaller agencies. Clients are super

important, but an individual

client may not be as

important compared to

smaller auditing firms.” -

R3

“We are not so dependent

Strong and broad client

base

60

on individual clients, we

have more client requests

than we can handle. Would

the independence be

questioned, you become uninteresting in the market,

that risk is much greater.

This would result in you

losing all your clients. This

makes it quite easy to stay

independent in cases where

the client threatens to

change auditors.” - R4

“But then I think that

auditors in the Big Four have strong integrity and

are very good at actually

being able to differentiate

between the social and the

professional”- R5

Integrity

Difference between

Big Four and non-Big

Four

A qualitative study on how Covid-19 will affect audit quality

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