This study empirically investigates the relationship between auditors' identification-based trust in client firms' managers (CEOs/CFOs) and their perceptions of auditors' professional skepticism. We employ a multimethod approach broken down into two studies. First, in Study 1, we approached auditors and clients using narrative interviews in order to identify the working definitions of interpersonal trust and professional skepticism and also to develop an empirical and testable hypothesis against the backdrop of the current literature. Second, in Study 2, an ordinary least squares regression based on data collected from 233 real auditor-client dyads in Germany reveals that auditors' identification-based trust is positively associated with their clients' perception of the auditors' professional skepticism. The identified coexistence of trust and professional skepticism in auditor-client dyads implies that regulatory measures that impede the evolution of trust between auditors and their clients will fail to enhance professional skepticism. Instead, regulations should give auditors and their clients sufficient leeway to establish identification-based trust.
JEL Classifications: M42.