This study provides a more complete examination of auditor-client pre-negotiation decisions and negotiation tactics when confronted with an ambiguous accounting issue. Because auditors and clients approach conflict resolution and make negotiation decisions in very different ways, the results should be of interest to auditors.
Bame-Aldred, C. W. and T. Kida. 2007. A Comparison of Auditor and Client Initial Negotiation Positions and Tactics. Accounting, Organizations, and Society 32 (6): 497-511.
The results of this study highlight the important role that perceptions of client fairness play in endangering social exchange relationships between individual auditors and clients. Client commitment, endangered by perceived client fairness and support, can result in higher levels of value-added audit service. This study also has practical implications for accounting firms. Firms can encourage clients to treat their auditors fairly by including language in the engagement letter describing the importance of the timely provision of audit request, adequate working conditions, and other efforts to ensure a smooth audit process. Future research could also examine the costs and benefits associated with value-added audit service from the client’s perspective.
Herda, D. N., and J. J. Lavelle. 2013. Auditor Commitment to Privately Held Clients and its Effect on Value-Added Audit Service. Auditing 32 (1).
The results of this study are important for audit firms to consider when determining if and how the firm should utilize negotiation trainings and interventions. Since the results indicated that larger write-downs were obtained in the role-playing strategy, the authors suggest that this may be the best of the three methods for auditors to utilize when preparing for a significant negotiation. It also appears that this results in a “win-win” for both the client and auditor. The auditor was able to obtain an adjustment to the financial statements that reflects the greatest accounting conservatism. Additionally, the evidence suggests that the role play intervention also resulted in increased levels of satisfaction with the negotiation and a willingness to work together in the future. Therefore, this strategy results in both increased levels of accounting quality and higher levels of some metrics of client satisfaction.
Trotman, K. T., Wright, A. M. and S. Wright. 2005. Auditor Negotiations: An Examination of the Efficacy of Intervention Methods. The Accounting Review 80 (1): 349-367
The results of this study offer initial evidence that manager narcissism is an observable measure of elevated fraud risk. These findings have clear implications for audit practice. The results suggest that auditors are aware of the link between client narcissism and increased fraud attitude risk. Public accounting firms should emphasize the linkage between specific client manager personality traits and the increased likelihood of fraud-related behaviors in fraud risk assessment training. This study may also be useful to standard setters and auditing firms as a means to improve professional guidance regarding how to assess fraud attitude and the resulting effect on auditors’ fraud risk assessments.
Johnson, E. N., J. R. Kuhn, B. A. Apostolou, and J. M. Hassell. 2013. Auditor Perceptions of Client Narcissism as a Fraud Attitude Risk Factor. Auditing 32 (1).
The results of this study identify that the “shadow” negotiation exists and provides insights into how the roles and relationships are negotiated. This research identifies the CFO as having the commanding position in the negotiation process and identifies the “turns” available to the auditor in the process. The authors indicate that the Sarbanes-Oxley Act may provide that auditor with a new “move” by requiring the auditor to disclose the “preferred” accounting method to the audit committee.
McCracken, S., S.E. Salterio, and M. Gibbins. 2008. Auditor-client management relationships and roles in negotiating financial reporting. Accounting, Organizations and Society 33 (4-5): 362-383
This paper extends previous work by examining how clients’ use of contending tactics affect auditors’ decisions during a negotiation, which separates itself from the research of the past by investigating the clients’ current negotiation tactics, not the tactics of the past. This paper also introduces the level-of-aspiration theory into consideration for auditor negotiation literature.
Bergner, J. M., S. A. Peffer and R. J. Ramsay. 2016. Concession, Contention, and Accountability in Auditor-Client Negotiations. Behavioral Research in Accounting 28 (1): 15-25
Chen, Q., K. Kelly, and S. Salterio. 2012. Do changes in audit actions and attitudes consistent with increased auditor scepticism deter aggressive earnings management? An experimental investigation. Accounting, Organizations and Society 37 (2): 95-115.
The findings of this study are important for audit firms to consider when resolving financial reporting issues with client management. The overall pattern of our results illustrates that audit managers and audit partners intend to use different negotiation strategies and, therefore, substituting managers for partners in order to increase audit efficiency may in some contexts undermine audit effectiveness. Indeed, concern is warranted based on these results that suggest that a manager’s intended strategy entering negotiations with client management may be, pending context, substantially different and more client-outcome-oriented than the partners’ intended strategy would be. This could be worrisome for audit partners if they are not aware of negotiations that managers are undertaking on their own while out in the field. From a practice perspective, partners need to be aware of circumstances where managers negotiate with client management, since the tactics employed and potentially the outcomes obtained by the manager may be different than if the partner had been involved. Thus, based on our findings, audit partners may be the more effective negotiators and, thus, will have better negotiated outcomes than less experienced managers.
For more information on this study, please contact Susan McCracken.
McCracken, S., S.E. Salterio, and R.N. Schmidt. 2011. Do managers intend to use the same negotiation strategies as partners? Behavioral Research in Accounting 23 (1): 131-160.
The results of this paper are of interests to both the management and the auditors in practice. While there are various concession-timing strategies, it is normal for the auditors to make a large concession towards the end of the negotiation and for the management to make a large concession at the start of the negotiation. Violating these norms will lead to ineffective outcomes. However, both the parties can make small, gradual concessions along the negotiation process and this gradual strategy will lead to the most effective outcomes. The findings can be generalized to other negotiation settings, such as the negotiation between the buyer and seller in transfer pricing settings.
Sun, Y., H. T. Tan, and J. Zhang. 2015. Effect of Concession‐Timing Strategies in Auditor–Client Negotiations: It Matters Who Is Using Them. Contemporary Accounting Research 32 (4): 1489–1506.
The findings provide evidence that auditors do hold a level of trust in client representatives and that the level of trust is associated with commonplace behaviors of client representative that attract trust. The results of this study are important to make auditors and auditing standards setters aware of factors that may lead to greater auditor trust of client management and perhaps consider whether there may be a potential for excessive trust to overwhelm the auditor’s professional skepticism. Note that the study was unable to determine whether the levels of trust that the auditors had for the client were such that auditor judgment would be compromised.
Rennie, M. D., L. S. Kopp, and W. M. Lemon. 2010. Exploring Trust and the Auditor-Client Relationship: Factors Influencing the Auditor’s Trust of a Client Representative. Auditing: A Journal of Practice and Theory 29 (1): 279-293