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  • The Auditing Section
    A Comparison of Auditor and Client Initial Negotiation...
    research summary posted May 4, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    A Comparison of Auditor and Client Initial Negotiation Positions and Tactics
    Practical Implications:

    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. 

    Citation:

    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.

    Keywords:
    Auditor-client negotiation, revenue recognition, financial reporting.
    Purpose of the Study:

    Auditors must work with clients when forming their financial reporting decisions and the two parties may encounter situations where their reporting goals are different.  This conflict can compel the auditor and client to enter into formal or informal negotiations.  Various studies have previously examined auditor-client negotiation behavior, but none have directly compared the negotiation decisions of auditors and clients when faced with the same negotiation context. As such, the overall purpose of the study is to further examine the negotiation behavior of auditors and clients when facing an ambiguous revenue recognition issue.  Negotiation behavior will ultimately have an impact on the firm’s financial reporting decisions. Below are the objectives that the authors address in their study: 

    • Examine the degree of flexibility inherent in auditor and client initial negotiation positions.
    • Examine whether auditors and clients accurately perceive the other party’s initial positions.
    • Examine the types of negotiation tactics auditors and clients are likely to use. 
    Design/Method/ Approach:

    The authors collected their evidence via research questionnaires mailed to auditors at national CPA firms and experienced financial managers at various companies during the Spring and Summer of 2002.  The auditor participants included partners, senior managers, and managers.  The financial managers included CFOs, controllers, accounting managers, and analysts from 38 different companies.  Participants read summary financial information, a description of the auditor-client relationship, and a scenario about the proper amount of revenue recognition in a specific conflict scenario.  Participants were asked questions about their initial negotiation positions, their range of acceptable amounts, their perceptions of the other party’s positions and limits, the importance of certain revenue recognition issues, and the likelihood of using specific types of negotiation tactics.

    Findings:
    • Auditors and clients differ in their desired recognition amounts, thus establishing the need for negotiation to resolve this conflict. 
    • Auditor solution sets (i.e., the revenue recognition amounts between their reporting goal and their limit) were about half as large as client solution sets, indicating considerably less flexibility by auditors during the negotiation process. 
    • Auditors’ and clients’ had overlapping solution sets, indicating that a negotiated settlement should still be quickly attainable for most auditor-client negotiations.
    • Clients’ perceptions were significantly more accurate than auditors’ perceptions about the other party’s goals and limits of recognition amounts.  Auditors appear to overestimate clients’ actual reporting goals and limits.
    • Auditors considered issues supporting higher revenue recognition (e.g., missing the analysts’ earnings estimates and management incentive bonus) as less important than clients.  Clients thought that consistency with existing revenue recognition methods and increased earnings variability were more important issues than did auditors.  However, auditors and clients considered issues supporting lower revenue recognition to be equally important.
    • Tactics:
      • The highest rated tactic by both auditors and clients was problem-solving (i.e., to provide substantial rationale for their solution to persuade the other party to change their mind). 
      • Both auditors and clients agreed they should try to get information about the other party’s preferences and that they would try to appear as if they would not back down from their initial position. 
      • The lowest rated tactic by both auditors and clients was to threaten to qualify the opinion (by auditors) or to threaten to terminate the relationship (by clients). 
      • Clients were more likely than auditors to use a tactic of bid high / concede later and a tactic of attempting to trade-off certain issues. 
      • Overall, auditors were less likely to use tactics that could be interpreted as appearing inconsistent with their professional responsibilities.
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management
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  • Jennifer M Mueller-Phillips
    Auditor Commitment to Privately Held Clients and its Effect...
    research summary posted May 25, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Auditor Commitment to Privately Held Clients and its Effect on Value-Added Audit Service
    Practical Implications:

    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.  

    Citation:

    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).

    Keywords:
    management letter; organizational commitment; social exchange theory; value-added audit service
    Purpose of the Study:

    Value-added audit service, defined as client-service activities resulting from an audit that are not directly related to verifying the financial statements, provide important benefits for both clients and audit firms. Examples of these activities include auditor advice and feedback on accounting, internal controls, and general business issues. The purpose of this study is to examine how social exchange relationships between individual auditors and their clients affect the extent to which auditors provide clients with value-added audit service. The authors focus on auditor commitment to clients as an attitudinal indicator of a high-quality social exchange relationship between auditors and clients as a predicator of value-added audit service. 

    Design/Method/ Approach:

    The authors use a research model that is based on social exchange theory. Email surveys were sent out to auditors by the firms at the request of the authors. Responses were collected in the spring of 2011, after the traditional audit busy season. The final sample used consists of 204 auditor responses at two public accounting firms that principally serve privately held clients.

    Findings:
    • Perceived fair treatment from clients endangers a social exchange relationship between auditors and their clients, leading to an increased level of client service.
    • Perceived fairness on the part of the audit client leads to perceived support from the client, perceived client support leads to client commitment, and client commitment results in increased value-added service.  
    • Client commitment is positively associated with the extent of value-added audit service provided to the client
    Category:
    Engagement Management
    Sub-category:
    Interactions with Client Management
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  • The Auditing Section
    Auditor Negotiations: An Examination of the Efficacy of...
    research summary posted May 7, 2012 by The Auditing Section, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Auditor Negotiations: An Examination of the Efficacy of Intervention Methods
    Practical Implications:

    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.

    Citation:

    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

    Keywords:
    Auditor negotiations, negotiations, intervention methods, role-playing
    Purpose of the Study:

    Even though a company’s financial statements are prepared by the client, successful auditor and client negotiations are an integral part of the process.  For example, the resolution of proposed audit adjustments and disclosures are often a result of negations between the client and auditor.  Therefore, the authors consider the effectiveness of three different negotiation preparation strategies – called interventions – on the outcome of auditor/client negotiations. The three strategies are the following: 

    • Role-playing intervention:  the auditor takes the client’s place in a mock negotiation with another team member before conducting the actual negotiation with the client. 
    • Passive intervention:  the auditor explicitly considers the client’s interests and options prior to the negotiation, but there is no mock interview before the actual negotiation.
    • Practice intervention: the auditor conducts a practice negotiation in which he/she takes the role of the auditor and another person assumes the role of the client. 

    The authors consider whether the different types of negotiation interventions will results in different negotiation outcomes, and they specifically hypothesize that the role-playing intervention will result in the most favorable outcome for the auditor.  THey suggest the use of the role-playing intervention will require the auditor to develop an understanding of the client’s interests, strategies and opinions.  By considering the client’s point of view, the auditor should be best prepared to conduct a successful negotiation with the client, and the auditor should be able to achieve a favorable outcome while being respectful to the client. 

    Design/Method/ Approach:

    The research evidence is collected using a case study conducted prior to December 2002.  The authors use a group of audit managers and partners from a Big 5 accounting firm.  During the experiment the subjects are asked to complete a negotiation which involves a potential lower of cost or market adjustment to raw materials inventory.   To begin, the subjects read the case materials, and then they complete one of the three interventions discussed above.  In role play or practice interventions, an actor assumes the role opposite of the subject. Next, the subject conducts the negotiation with an actor (different from the actor utilized in the intervention) who assumed the role of the client’s CFO.  At the end of the negotiation, the subject records the agreed upon adjustment and answers question about the negotiation process, satisfaction with the outcome, and perceptions about the ongoing client relationship.

    Findings:
    • The authors find that the use of role-playing prior to negotiations resulted in the greatest inventory write-downs (i.e. the best outcome), when compared to both the practice and passive interventions.  The passive intervention (i.e., thinking about the client’s interests and options) was the second most effective, while practice negotiations provided the least benefit.
    • Those subjects in the role-playing interventions also experienced greater levels of satisfaction with the negotiation outcome, increased desirability of future dealing with the client, and a belief that the client had a better understanding of the options important to the auditor.
    • The authors find that those subjects in the practice intervention were able to negotiate a larger inventory write-down during the negotiation with the CFO when compared to the initial practice round.  Therefore, the practice intervention is able to provide incremental benefits to the negotiation process.
    Category:
    Engagement Management
    Sub-category:
    Interactions with Client Management
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  • Jennifer M Mueller-Phillips
    Auditor Perceptions of Client Narcissism as a Fraud Attitude...
    research summary posted June 7, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.04 Management Integrity, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Auditor Perceptions of Client Narcissism as a Fraud Attitude Risk Factor
    Practical Implications:

    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.  

    Citation:

    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).

    Keywords:
    attitude/rationalization; fraudulent financial reporting; narcissism; risk assessment
    Purpose of the Study:

    Despite increased emphasis on fraud detection in the auditing standards since the passage of the Sarbanes-Oxley Act of 2002, fraudulent financial reporting continues to be a serious concern. Auditing standards state that the auditor should consider client management’s attitude toward fraud when making fraud risk assessments. Very little guidance, however, is provided in the auditing standards or existing fraud literature on observable indicators of fraud attitude. This study tests whether observable indicators of narcissism, a personality trait linked to unethical and fraudulent behavior, is viewed by auditors as an indicator of increased fraud attitude risk. 

    Design/Method/ Approach:

    The authors developed an audit judgment case scenario that included specific indications of client fraud attitude and fraud motivation. Narcissism and motivation were each manipulated at two levels (high or low) in a 2 X 2 design. Participants selected were 101 practicing auditors from several U.S. offices of a large international public accounting firm. The data was collected in an experimental setting, where the participants were randomly assigned to one of four possible experimental conditions and individually completed the experimental materials. Responses were gathered through a combination of: (1) “live” administration at firm training events attended by the researchers; and (2) mail responses, where the managing partners of four firm offices agreed to distribute questionnaires and coordinate their completion and return. The overall goal was an initial experiment of client narcissism as a fraud risk factor in an audit context. 

    Findings:
    • Results indicate a narcissism effect, with significantly higher assessments of fraud risk when a client manager was described as exhibiting narcissistic characteristics. 
    • Auditors assessed fraud risk as significantly higher in the presence of motivations for the client manager to commit fraud.
    • Narcissism did not interact with fraud motivation in influencing auditor fraud risk judgments; high levels of either fraud attitude risk or fraud motivation risk were sufficient to increase auditors’ fraud risk assessments.
    Category:
    Engagement Management, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Assessment, Interactions with Client Management, Management Integrity
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  • The Auditing Section
    Auditor-Client Management Relationships and Roles in...
    research summary posted May 4, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Auditor-Client Management Relationships and Roles in Negotiating Financial Reporting
    Practical Implications:

    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.

    Citation:

    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

    Keywords:
    Auditor-client negotiation
    Purpose of the Study:

    This study focuses on the audit partner-chief financial officer (CFO) pair (i.e. the two main negotiators) in an actual ongoing relationship.  The authors use social positioning research, which investigates not only the substantive issues under negotiation, but also the “shadow” negotiation, which defines the roles of the negotiators, as well as negotiating power, in the relationship.  This research theorizes that the “shadow” negotiation occurs at the same time as the negotiation of the substantive issue and that the “shadow” negotiation affects the substantive issue negotiation.  This study examines the negotiator’s available “moves” to define how the relationship works and the power of each negotiator and the opposing negotiator’s “turn” to counter resist any attempt to change the positioning of the two parties.  The main objective of this study is to examine the relationships among the audit partner-CFO pairs.

    Design/Method/ Approach:

    The authors interviewed eight CFO-auditor pairs regarding auditor-client management negotiations in November and December 2001.  Interviews were first conducted with the CFOs regarding a specific example of an accounting issue negotiated with the auditor.  These were followed by interviews of the audit partner, five used the same example as the CFO, three used a different example.  The interviews typically lasted 45-75 minutes and were conducted by asking three open-ended questions in a conversational tone followed by five specific questions if they were unanswered in the open ended questions. 

    Findings:
    • In the partner/CFO pair, the audit partner is the “relationship manager,” responsible for developing or maintaining a “good” relationship, while the CFO determines the type of relationship that develops.  
    • The relationship between auditor and client is either proactive or reactive.  In a proactive relationship the auditor and CFO work together throughout the year (auditor is an “expert advisor”) whereas in a reactive role the auditor is not informed until time for the review (auditor is a “police officer”).  
    • The audit firm focuses on client management versus ending the relationship.  The firm prefers to assign a partner that matches the CFO’s preferred relationship style rather than threaten the loss of the client. 
    • The CFO can perform “moves” to change the auditor role to the desired relationship type including the threat to end the relationship, asking for a second opinion from national office, and indicating that the economic reality is not reflective in the GAAP accounting.  The auditor may “turn” these “moves” by preemptively consulting the national office. 
    • The auditor’s only “move” in the relationship is the passage of time to get to know the CFO better.
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management
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  • Jennifer M Mueller-Phillips
    Concession, Contention, and Accountability in Auditor-Client...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
    Title:
    Concession, Contention, and Accountability in Auditor-Client Negotiations
    Practical Implications:

    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.

    Citation:

    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

    Keywords:
    auditor-client negotiations, accountability, concurring partner review, and level-of-aspiration theory.
    Purpose of the Study:

    This study focuses on investigating how tactics employed by a client during negotiations impact experienced auditors’ propensity to waive material adjustments and whether the salience of a concurring partner review (CPR) can affect these negotiations. The audit profession as a whole remains fixated upon auditor independence and financial statement quality, so it is important to examine potential tactics by a client since negotiations directly affect the resulting financial statements. The authors of this study hope to expound upon existing literature by examining how a client who is concessionary or contentious during the negotiation may affect its outcome. In addition, they study whether a CPR reduces auditors’ propensities to waive material adjustments. 

    Design/Method/ Approach:

    The authors conduct an online experiment in which auditors make decisions about the audit of a hypothetical client. They manipulate two independent variables: client tactics and CPR salience.

    Findings:
    • The authors find that auditors are more likely to waive material adjustments when clients use contending tactics during negotiations. This particular results varies from previous studies that examined negotiation outcomes involving contentious clients. The former studies examine pre-negotiation situations where the client has been contentious in the past, this study finds that auditors react differently when the client is being contentious during the current negotiation.
    • The authors find that the level-of-aspiration (LOA) theory may describe auditors’ decisions regarding contentious clients. Reciprocity theory has been used in the past but does not explain these results. Reciprocity theory predicts that auditors will respond to a contentious client by becoming more contentious, while LOA predicts the opposite. Because this study finds that the auditor conceded to the wishes of the contentious client, the results follow LOA.
    • The authors find that the presence of an existing quality control procedure mitigates the auditors’ propensity to waive material adjustments.
    Category:
    Audit Quality & Quality Control, Engagement Management
    Sub-category:
    Interactions with Client Management, Management/Staff Interaction
  • Jennifer M Mueller-Phillips
    Do changes in audit actions and attitudes consistent with...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.06 Earnings Management, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Do changes in audit actions and attitudes consistent with increased auditor scepticism deter aggressive earnings management? An experimental investigation
    Practical Implications:
    • Regulators and standard setters have been concerned that we do not know which audit actions most likely detect fraud.  An understanding of what audit procedures are likely to discourage managers from committing fraud is valuable. 
    • Specifically, the study shows that changes in the nature and extent of audit procedures combined with increased skepticism via critical inquiry are helpful in deterring potentially fraudulent behavior. 
    • Similar changes in audit procedures also affect management’s judgment about the ethicality of potentially fraudulent behavior. 
       
    Citation:

    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.  

    Keywords:
    Fraud, Audit Procedures, Professional Skepticism, Earnings Management
    Purpose of the Study:

    Recent years have brought increased focus on the financial statement audit as not just a means of detection but a deterrent to fraud.  The link between detection and deterrence is made in practice because an increase in the ability to detect fraud on the part of the auditor (if widely known) should also lead to an increase in the ability of the audit process to deter fraud.
    The current study seeks to identify whether different audit procedures and attitudes toward management deter aggressive earnings management that is possibly fraudulent.  Using the experimental research approach allows the authors to focus on a scenario where the increase in deterrence is not due to an increase in the probability of detection but is most likely due to the specific changes in the audit approach tested. 
     

    Design/Method/ Approach:

    Corporate managers were placed in different experimental conditions to examine differences in their assessments about potentially fraudulent behavior.  Participants were told they were the manager of a firm for which rotational audits are performed.  In the current year, the manager’s division was not being audited, but they were made aware of the audit procedures being performed in other divisions.  In one condition, the procedures were the same as last year (SALY).  In another condition, the extent or quantity of evidence collected would be increased.  In the third condition the nature of evidence collected was increased (i.e. confirmations rather than internal documentation).  Within each of these three conditions half of the participants would also note an increase in auditor skepticism via more critical inquiry procedures while the other half would not.  Managers were then asked to assess a level of potential earnings management in their division as well as the ethicality of any potential earnings management.  The experiment was web-based.

    Findings:
    • When managers find out about a change in the nature of audit work being performed at other divisions, they respond by reducing earnings management in their own division as compared to the condition where procedures were the same as last year or where the change in procedure is an increase in audit evidence only. 
    • Managers exhibited this behavior even though the changes in procedures did not affect their division. 
    • Combining a more skeptical auditor attitude toward a manager with a change in the nature of audit evidence, the extent of evidence collected, or a change in the nature of the evidence, reduces earnings management as compared to the same as last year condition
    • An increase in evidence collected alone, or more critical inquiry alone does not significantly deter earnings management relative to the condition where procedures were the same as last year.
    • The results of management’s assessment of the ethicality of potential earnings management mirrors the results for the planned level of earnings management described above.  These results hold, even after considering manager ethical disposition.
       
    Category:
    Auditing Procedures - Nature - Timing and Extent, Engagement Management, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Auditors’ Professional Skepticism, Earnings Management, Interactions with Client Management
  • Jennifer M Mueller-Phillips
    Do Manages Intend to Use the Same Negotiation Strategies as...
    research summary posted November 5, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    Do Manages Intend to Use the Same Negotiation Strategies as Partners?
    Practical Implications:

    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.

    Citation:

    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.

    Keywords:
    Negotiation, strategy, experience, power, surrogate, auditor
    Purpose of the Study:

    Auditor-client management (ACM) negotiations frequently occur between the audit partner and the Chief Financial Officer, but there is also evidence that the audit manager attempts to negotiate resolutions to issues in order to increase audit efficiency, to increase the manager’s image of competence with the partner or in response to time pressures. Given the importance of ACM negotiations to the resulting financial statements shown in previous work in the ACM negotiation area, as well as the tendency for managers to conduct these negotiations in place of the partners, it is important to determine whether partners and managers intend to utilize similar or different negotiation strategies. From a practice perspective, if audit partners’ and managers’ intended negotiation strategies are different, then audit effectiveness may be compromised when managers undertake ACM negotiations. However, if the intended negotiation strategies of the partner and manager are the same, then there would be evidence to suggest that improvements in audit efficiency may be achieved by having managers undertake the ACM negotiations. Furthermore, from a research perspective, if there are differences in intended negotiation strategies between partners and managers, then results from prior studies that utilize managers as participants may not generalize to audit partners.

    Design/Method/ Approach:

    The experimental research evidence was collected in 2005. The authors measured the level of auditor participants (audit manager or audit partner) and manipulated the client management’s initial accounting position flexibility and ACM relationship in the experimental case context. After reading the case, participants were asked to indicate their likelihood of employing each of the 25 tactics related to the five negotiation strategies (expanding the agenda, problem solving, contending, compromising and conceding) in an upcoming negotiation with the client.

    Findings:
    • The integrative strategies’ results show that partners are less likely than managers to use the integrative strategy “expanding the agenda”. While less conclusive, our results also suggest that partners are less likely than mangers to use the integrative strategy “problem solving”. We find that this difference in planned strategy is not due to years of experience, but rather both of these findings are consistent with the power/status theory in the generic negotiation literature.
    • The distributive strategies’ results show that managers are less likely to use the contending strategy and more likely to use the concessionary and compromising strategies than partners. Our conclusions, however, must be qualified by the interaction of level with the accounting context factors embedded in the experimental case (prior client relationship and flexibility of client’s initial accounting position). An exception is the less commonly used concessionary strategy where we find managers are more likely to intend to use this strategy than the partners, irrespective of the accounting context. When examining the pattern of the interactions, we see a greater reaction to the accounting context by the partners than by the managers, again, likely due to partners’ greater experience and power/status in negotiations
    Category:
    Audit Quality & Quality Control, Engagement Management
    Sub-category:
    Interactions with Client Management, Sustainability ServicesTraining & General Experience
  • Jennifer M Mueller-Phillips
    Effect of Concession-Timing Strategies in Auditor–Client N...
    research summary posted January 20, 2016 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Effect of Concession-Timing Strategies in Auditor–Client Negotiations: It Matters Who Is Using Them.
    Practical Implications:

    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.

    Citation:

    Sun, Y., H. T. Tan, and J. Zhang. 2015. Effect of ConcessionTiming Strategies in AuditorClient Negotiations: It Matters Who Is Using Them. Contemporary Accounting Research 32 (4): 14891506.

    Keywords:
    negotiation strategies, auditors, financial managers, norms
    Purpose of the Study:

    There are three types of concession-timing strategies available to the auditors and the management in an audit adjustment negotiation: 1) start strategy- offer large concessions only at the beginning of the negotiation; 2) end strategy - offer large concessions only near the end of the negotiation; and 3) gradual strategy  offer small, gradual and reciprocal concessions along the negotiation process. The paper first considers the norms on who should use certain types of the strategies and then investigate whether norm-violation will render the negotiation strategy ineffective. Specifically, the authors expect it is the norms for the auditors to adopt either the start strategy or the gradual strategy and for the management to adopt either the end strategy or the gradual strategy. Norm-inconsistent behaviors mean the auditors use the start strategy and the management use the end strategy.

    General negotiation studies have examined the effectiveness of the three concession-timing strategies but those studies neither examine party-specific effectiveness nor consider reactions from the counter-party. The purpose of this paper is to take those considerations into account and examine the norm effect in an auditor-client negotiation context.

    Design/Method/ Approach:

    The authors collected the evidence via an experiment conducted in China during the early 2010s. A group of auditors from the Big 4 accounting firms and a group of financial managers participate in the experiment. The audit disagreement is related to an impairment charge. Through manipulating the negotiation strategies of the hypothetical counter-party, the authors record the concession amounts made by the auditors and the financial managers respectively.

    Findings:
    • The authors find the financial manager participants concede more if the hypothetical auditors adopt either the start or the gradual strategy and the two strategies does not have significant different impacts on the concession amounts.  
    • The authors find the auditor participants concede more if the hypothetical financial managers adopt either the start or the gradual strategy but the impact on the concession amounts is greater for the gradual strategy than the start strategy.
    • The authors also find the financial manager participants and auditor participants response with less norm-consistent behaviors if the hypothetical counter-party adopts a norm-inconsistent strategy.
    • The authors elicit the beliefs of the financial manager participants and the auditor participants about the norms on the use of specific strategies. They find evidence consistent with their expectations. Specifically, the general beliefs from both parties are that the auditors should adopt either the end or the gradual strategy and the managers should adopt either the start or the gradual strategy.
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Interactions with Client Management
  • The Auditing Section
    Exploring Trust and the Auditor-Client Relationship: Factors...
    research summary posted May 3, 2012 by The Auditing Section, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Exploring Trust and the Auditor-Client Relationship: Factors Influencing the Auditor’s Trust of a Client Representative
    Practical Implications:

    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.

    Citation:

    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

    Keywords:
    Trust, Professional Skepticism, Auditor-Client Relationship
    Purpose of the Study:

    A financial statement audit cannot be conducted in the absence of the auditor’s trust of client management.  The auditor needs information provide by management and the cooperation of management to carry out the audit.  Thus, the auditor has no option but to bestow some degree of trust upon client management.  Yet, if trust is too strong, professional skepticism could be impaired.  Below are the objectives of this descriptive, exploratory study: 

    • To shed light on auditors’ trust of client management using the context of an auditor-client disagreement.
    • To learn about client behaviors (e.g. openness of communication and demonstration of concern) that may influence the auditor’s trust of a client.
    • To learn about aspects of the auditor-client relationship (length of association and frequency of past disagreements) that may influence the auditor’s trust of a client.
    • To gather auditors’ opinions about the importance of trust and about managing the balance between trust and professional skepticism.
    Design/Method/ Approach:

    The authors collected their evidence via a survey questionnaire prior to June 2007. Participants surveyed include 71 experienced auditors (48 partners, 2 principals, 20 senior managers, and 3 managers) from Canadian international accounting firms. Participants were asked to briefly describe a disagreement they had previously had with a client and were asked specific questions about that disagreement.

    Findings:
    • A disagreement experience with the client is relevant to the auditor’s trust of that client.
    • A client’s openness of communication during the course of a disagreement is positively associated with the auditors’ trust of that client representative.
    • A client’s demonstration of concern toward the auditor appears to be trust-relevant.
    • The frequency of disagreements with the client is negatively associated with the auditor’s trust of the client.
    • The length of the auditor-client relationship is positively associated with the auditor’s trust.
    • An auditor’s satisfaction with the outcome of the disagreement is positively associated with the auditor’s trust. 
    • The auditor’s predisposition to trust is not associated with the auditor’s trust of the client.
    • Auditors believe it is important to trust their clients but they also attempt to ensure that trust does not impede professional skepticism.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Engagement Management
    Sub-category:
    Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management
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