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  • Jennifer M Mueller-Phillips
    Managers’ Strategic Reporting Judgments in Audit N...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management, 13.0 Governance, 13.05 Board/Audit Committee Oversight, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    Title:
    Managers’ Strategic Reporting Judgments in Audit Negotiations
    Practical Implications:

     The results of this study are important to consider when examining the effects of the audit committee on managers’ judgments. This study identifies the changes to the reporting environment stemming from the implementation of SOX, particularly with respect to communications between auditors and the audit committee and the authority and responsibility of the audit committee. This study adds insight to prior archival research that suggests that audit committees considered to be effective are associated with greater financial reporting quality. Further, these findings suggest that managers act as if auditors and audit committees that jointly resist management pressures to engage in aggressive reporting play important roles in ensuring high financial reporting quality.

    Citation:

     Brown-Liburd, H., A. Wright and V. Zamora. 2016. Managers’ Strategic Reporting Judgments in Audit Negotiations. Auditing, A Journal of Practice and Theory 35 (2): 47-64.

    Keywords:
    Audit negotiation, past counterpart relationship, audit committee oversight
    Purpose of the Study:

     Prior research has largely characterized audit issue negotiations as a dyadic relationship between auditors and managers. However, the Sarbanes Oxley Act (SOX) substantially enhanced the audit committee’s oversight responsibilities for the financial reporting and auditing process. Thus, negotiations post-SOX may be viewed as a triadic relationship involving managers, auditors, and the audit committee. Differing judgments between auditors during negotiations and managers during financial reporting exist because they have different perspectives and incentives. Whereas managers’ incentives relate to maximizing financial reporting outcomes while maintaining the firm’s reporting reputation, auditors’ incentives relate to fostering a functioning working relationship with the client while appropriately attesting to the financial statements. These differences in perspectives and incentives yield contrasting expectations of negotiation judgments for auditors and managers. This study seeks to examine the joint effects of past auditor-client negotiations and audit committee strength on management’s strategic reporting judgments.

    Design/Method/ Approach:

     The authors recruited participants from an executive training session attended by CFOs/controllers and held at a large public university in the southeastern U.S. During a controlled experiment, participants completed the hard copy experimental case. Participants engaged in planning for an upcoming audit negotiation involving a subjective estimate for an inventory write down due to obsolescence. The authors asked participants to identify their initial offer and their perception of the negotiated ultimate final outcome. Audit committee strength was manipulated as either weak or strong. The nature of past auditor-client negotiations over “grey” misstatements was manipulated as either contentious or cooperative.

    Findings:

    The results are consistent with a strong combined effect of the roles of both the auditor and the audit committee in managers’ pre-negotiation judgments.

    • The presence of both strong audit committee oversight and an auditor that has been contentious in past negotiations together significantly constrain managers’ aggressive reporting.
    • The presence of weak audit committee oversight and an auditor that has been cooperative in past negotiations jointly provide the opportunity for managers to engage in more aggressive reporting.
    • Managers report less aggressively in the presence of a contentious auditor and strong oversight by the audit committee to ensure timely resolution and protect the firm’s financial reporting reputation, and to minimize the risk that the audit committee will intervene against the managers’ favor.
    • Managers report more aggressively in consideration of his/her relative bargaining power against a cooperative auditor who appears to have high relationship concerns, along with weak oversight by the audit committee that is passive/persuadable. 
    Category:
    Corporate Matters, Engagement Management, Governance
    Sub-category:
    Audit Committee Effectiveness, Board/Audit Committee Oversight, Interactions with Client Management
  • The Auditing Section
    Negotiations Over Accounting Issues: The Congruency of Audit...
    research summary posted April 13, 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:
    Negotiations Over Accounting Issues: The Congruency of Audit Partner and Chief Financial Officer Recalls
    Practical Implications:

    The results of this study are important for auditors and managers to consider when negotiating.  For example, the authors propose that auditors must take the initiative if they hope to achieve a “win-win” compromise because CFOs view negotiation as surrounding one issue, while audit partners view negotiations as involving multiple issues at once.  Findings from negotiation research shows that “win-win” solutions are more likely when issues are integrated than when they are isolated.  Furthermore, the authors propose that audit partners should be trained to recognize that CFOs are more likely to view the negotiation as a “win-lose” negotiation.  As a result, auditors must be trained to use tactics to achieve good outcomes under a “win-lose” scenario or to purposefully change the negotiation to a “win-win” style of negotiation when the potential for such an outcome exists.  Finally, the authors propose that auditors should be trained to understand that CFOs have different perspectives on the context of the negotiation (such as differing opinions of staff expertise), and reaching good outcomes is partially dependent on understanding the perspective of the other party.

    Citation:

    Gibbins, M., S. A. McCracken, and S.E. Salterio. 2005. Negotiations Over Accounting Issues: The Congruency of Audit Partner and Chief Financial Officer Recalls. Auditing: A Journal of Practice and Theory 24 (Supplement): 171-193.

    Keywords:
    accounting negotiation, audit partner, chief financial officer
    Purpose of the Study:

    Auditor-client disagreements over accounting treatment are frequently negotiated as part of the audit process.  The outcomes of the
    negotiations determine the content of financial statements making auditor-client negotiation a process of interest to regulators, financial statement users, auditors and their clients, and researchers alike.  However, because negotiations take place behind closed doors, very little data is available to study the negotiation process and outcomes.  For example, there is little evidence as to whether or not CFOs and audit partners view the process in the same way.  The authors base the paper on a model of the audit negotiation process that involves six negotiation elements: antecedents; issues involved; process; outcome; consequences; and context. Using this model, the authors attempt to investigate reporting of negotiation elements, importance of contextual features, and consistencies vs. inconsistencies in the negotiation process for CFOs and audit partners.

    Design/Method/ Approach:

    The research evidence is collected by questionnaire during 1997 for audit partners and during 2002 for the CFO sample (both in Canada).  Participants responded to a questionnaire asking about their recollection of an audit negotiation that they had been personally involved with in the past. Questionnaires were designed differently for CFOs and audit partners, respectively.

    Findings:
    • The authors find that, in general, audit partners and CFOs recalled the same elements and contextual features of the negotiation process.  Four important elements with high levels of agreement include:
    • Relatively little involvement of the audit committee
    • High desire of both parties to reach an agreement
    • Very little evidence of opinion shopping
    • Importance of commonly identified contextual features
    The authors find that very few contextual features were consistently rated as important to the negotiation process.  These features are: The role of accounting standards The level of expertise of the negotiating parties The relationship between the negotiating parties The authors find that CFOs are more likely to view negotiation as involving one issue, whereas audit partners are more likely to view negotiation as involving multiple issues. Audit partners are more sensitive to outcomes of prior negotiations with the client whereas CFOs are more sensitive to the expertise of the participants and the quality of the relationship.
    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
    Organizational Error Climate and Auditors’ Predispositions t...
    research summary posted October 3, 2013 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.03 Interaction among Team Members, 10.04 Interactions with Client Management, 11.0 Audit Quality and Quality Control 
    Title:
    Organizational Error Climate and Auditors’ Predispositions toward Handling Errors
    Practical Implications:

    The results of this study imply that an appropriately structured error climate may serve as a “soft” management control tool for an audit organization by encouraging the development of predispositions toward functional error handling behaviors, and reducing the tendency of auditors to engage in dysfunctional error handling behaviors such as ignoring or concealing errors. This increase in functional auditor error management behaviors supports both high quality work results and client cooperativeness. Managers of audit organizations should actively participate in the organization’s error climate by establishing, communicating, and practicing a high error management method. The efforts in actively dealing with the organization’s error climate could be documented and presented to regulators and oversight bodies such as the PCAOB as an integral part of the audit organization’s internal quality control.


    For more information on this study, please contact Ulfert Gronewold.
     

    Citation:

    Donle, M., and U. Gronewold. 2011. Organizational error climate and auditors’ predispositions toward handling errors. Behavioral Research in Accounting 23 (2): 69-92.

    Keywords:
    organizational culture; handling errors; audit quality; predispositions
    Purpose of the Study:

    An auditor is required to comply with professional and ethical standards that mandate performing any engagement with professional competence and due care, that is, auditors must act carefully, thoroughly, and on a timely basis. Reasonably, one can infer that because of these professional standards, it is essential for auditors to able to openly address errors as they become aware of them. The authors chose to define “error” as any significant divergence that the auditor perceives between an actual state and what the auditor thinks would be the correct state, as defined by relevant goals and benchmarks. Additionally, the authors chose to focus this study on unintentional errors with respect to both the client and the auditor. Auditors need to effectively handle their own errors as well as the errors of their clients in order to assure audit quality. The way an auditor deals with a client’s error may affect that client’s cooperativeness which has an influence on the auditor’s ability to conduct the audit effectively and efficiently.

    The authors suggest that the audit organization’s error climate correlates with an auditor’s likelihood to address errors in an active and open way. Error climate is shaped by management’s tone at the top regarding its views and decisions towards the acceptability and handling of errors. An error climate that is high in error management would be beneficial for audit quality in both the long term and the short term by ensuring that errors are corrected in a timely basis and also enabling auditors to learn from errors in order to handle them or avoid them in the future.

    Moreover, high error management can suppress the temptation to conceal errors for fear of the repercussions which is quality threatening behavior in auditing. To explore the correlation between error climate and auditor’s predisposition toward dealing with both their own and their client’s errors, the authors developed an expectation that organizational error climate has a direct positive impact on auditors’ predispositions toward dealing with their own errors and detected client errors.
     

    Design/Method/ Approach:

    The data for this study was collected through a survey external, internal, and public sector auditors. The information was collected from October 2004 to May 2005 among auditors located in Germany.

    Findings:
    • High error management-oriented climates are beneficial for performance and work quality by affecting the predisposition of the members of the organization toward high error management behaviors.
    • There is a significant positive impact of organizational error climate on auditor’s predispositions towards handling their own errors.
    • The authors found no direct effect of error climate on the predisposition toward handling client errors. However, a positive and significant indirect effect was observed. The positive impact that a high error management-oriented climate has on auditor’s predisposition toward handling their own mistakes in turn affects how the auditor handles client which creates an indirect relationship between the audit organization error climate and client errors.
    • Auditors of organizations that handle errors with a high degree of error management have a higher propensity of also handling client errors with a high degree of error management.
    • Overall, an audit organization’s error climate influences auditors’ individual predisposition toward handling their own errors as well as their clients’ errors.
       
    Category:
    Audit Quality & Quality Control, Engagement Management
    Sub-category:
    Interaction among Team Members, Interactions with Client Management
  • The Auditing Section
    Resolving Disputed Financial Reporting Issues: Effects of...
    research summary posted April 23, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Resolving Disputed Financial Reporting Issues: Effects of Auditor Negotiation Experience and Engagement Risk on Negotiation Process and Outcome
    Practical Implications:

    The critical implication from these findings is that, despite the expectation of conservatism required by GAAP, under certain circumstances some auditors may acquiesce more readily to client pressures than other auditors.  Specifically, when engagement risk is high, auditors with lower negotiation experience may tend to make more concessions in negotiations to the client than auditors with higher negotiation experience or auditors in a lower engagement risk setting.  

    Thus, though the paper does not discuss the following point specifically, the audit firms should be aware of this vulnerability of auditors with lower negotiation experience and should consider this in planning negotiations and assignments.  Potentially, audit firms may consider assigning managers and partners who are less experienced in negotiation to clients with lower engagement risk and/or lower litigation exposure for the audit firm.  Alternatively, when managers or partners with lower negotiation experience are placed on clients with high engagement risk, firms may consider assigning a manager or partner with more negotiation experience to accompany the manager or partner with less negotiation experience. 

    Citation:

    Brown, H. L., and K. M. Johnstone. Resolving Disputed Financial Reporting Issues: Effects of Auditor Negotiation Experience and Engagement Risk on Negotiation Process and Outcome. Auditing: A Journal of Practice and Theory 28(2):65-92.

    Keywords:
    auditor decision-making; experience; negotiation; risk.
    Purpose of the Study:

    Auditing necessitates negotiation between the auditor and the client to resolve disputed reporting issues.  Such negotiation can materially affect financial statements.  However, little is known regarding how contextual factors, such as auditor or client characteristics, affect client-auditor negotiations.  Understanding how such factors affect client-auditor negotiations is important because such an understanding provides insight into how training, personnel assignment, and other audit interventions may improve audit quality and reduce litigation exposure related to the issues involved in client-auditor negotiation.  Brown and Johnstone investigate how two factors, engagement risk and auditor negotiation experience resolving complex financial reporting issues, impact the process and outcome of client-auditor negotiation.

    Design/Method/ Approach:

    Brown and Johnstone collected their evidence via an experiment in which audit partners and managers who participate assume the auditor role in an experimental case setting.  The experimental case involves a complex revenue recognition issue, for which professional standards are imprecisely defined.  In the case, the auditors are required to decide how to allocate revenue between current and future periods for a multi-year contract.  The client’s preference is to recognize the majority of the revenue currently, though most of the earnings process is not complete.  Auditor participants then negotiate with the client via the internet.  Pre-determined client responses are generated by a computer program.  The experimental data was collected in the early 2000’s.

    Findings:

    Auditors with lower negotiation experience in the context of high engagement risk compared to (1) the auditors with lower negotiation experience in the context of low engagement risk and (2) the auditors with higher negotiation experience in both low and high engagement risk contexts, exhibit the following differences in judgments:

    • Significantly more concessions
    • Marginally less conservative negotiation outcomes
    • Marginally less confidence about whether their final outcomes are appropriate under GAAP
    Category:
    Audit Team Composition, Engagement Management
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Interactions with Client Management
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  • Jennifer M Mueller-Phillips
    Technology-Facilitated Contribution Behavior: An...
    research summary posted July 20, 2015 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.03 Interaction among Team Members, 10.04 Interactions with Client Management 
    Title:
    Technology-Facilitated Contribution Behavior: An Experimental Investigation.
    Practical Implications:

    The results speak to the importance of recruiting competent professionals to the workforce and making specific requests for assistance that include required deliverables. As individuals build confidence in their expertise and understand exactly how to assist, they will be able to provide higher-quality responses to share knowledge. This study extends the literature by operationalizing and studying mediating mechanisms to motivation to contribute and contribution quality separately. This study extends this research in an experimental setting to analyze factors expected to affect the motivation to contribute and contribution quality. By incorporating a collaboration platform included in the Microsoft Office Suite (i.e., a single technology), the effect of technology was controlled in the research design.

    Citation:

    Du, H., Lehmann, C. M., & Willson, V. L. 2014. Technology-Facilitated Contribution Behavior: An Experimental Investigation. Behavioral Research In Accounting 26 (2): 97-130.

    Keywords:
    collaboration, contribution behavior, motivation to contribute, response quality
    Purpose of the Study:

    Contribution behavior is described as voluntarily providing assistance or sharing knowledge when a colleague makes a request for assistance. The importance of knowledge sharing, specifically in the form of contribution behavior is an area of interest to accounting professionals. An inability or unwillingness to share professional knowledge and expertise within an accounting firm can lead to lower-quality or less-efficient audits. The purpose of this study is to examine the motivation to contribute but also examines contribution quality. This study also evaluates the mediating mechanisms of knowledge about the individual requesting assistance, the expertise level of the contributor, and the specificity of the request in the motivation to contribute, as well as the contribution quality.

    Design/Method/ Approach:

    The theoretic research model is structured to focus on the three key elements in contribution behavior: awareness, searching and matching, and formulation and delivery. The experiment was designed using a collaboration application that is included in the Microsoft Office Suite. One hundred eighty-three graduate and undergraduate students enrolled in Accounting Information Systems classes (both graduate and undergraduate levels) and a graduate IT Auditing class at a large commuter university served as participants in this study. The evidence was gathered prior to April 2014.

    Findings:

    While knowledge about a requester motivates the individual to contribute and the individual’s prior positive experience with the requester enhances the motivation, the individual’s expertise level on domain knowledge and the specificity of request are not associated with motivation to contribute. However, with regard to contribution quality, domain knowledge and specificity of request are positively associated with higher contribution quality, making these mediating effects pronounced in contribution quality, but not in motivation to contribute.

    The results indicate that individuals are more motivated to respond to a request for assistance if they feel at ease with the requester. Their domain knowledge and the specificity of a request further improve the contribution quality. The implications of this study point to the importance of developing a collegial and interactive environment in which professionals are more likely to share knowledge to help each other. Creating opportunities for friendly and positive experiences with colleagues encourages employees to respond to requests for assistance. Accounting firms can foster an environment that promotes contribution behavior by developing cooperative and positive relationships among employees so that when someone needs help, there is a higher likelihood that there will be responses because of familiarity with the requesting colleagues. Moreover, the professional’s expertise level or domain knowledge and the specificity of the request are relevant. While not directly related to the motivation to assist the requester, expertise and specificity of the request are associated with the contribution quality.

    Category:
    Engagement Management
    Sub-category:
    Interaction among Team Members, Interactions with Client Management
  • The Auditing Section
    The Auditor’s Strategy Selection for Negotiation with M...
    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:
    The Auditor’s Strategy Selection for Negotiation with Management: Flexibility of Initial Accounting Position and Nature of the Relationship
    Practical Implications:

    The results of the study suggest that audit partners are highly likely to use integrative negotiation strategies (i.e., where both parties experience a “win”), even in the variety of accounting contexts included in the study.  This finding implies that audit partners may routinely look for “wins” for client management, which under certain circumstances, could result in materially misstated financial statements.  The authors suggest that by gaining a more “fine-grained” knowledge of when to utilize the various negotiation tactics, along with the ability to use the tactics effectively, auditors may be even more prepared to deal with negotiations with client management that involve contentious accounting issues.  

    Citation:

    Gibbins, M., McCracken, S., and Salterio, S.E. 2010. The Auditor’s Strategy Selection for Negotiation with Management: Flexibility of Initial Accounting Position and Nature of the Relationship. Accounting, Organizations, and Society 35(6): 579 – 595.

    Keywords:
    Auditor judgment; engagement management
    Purpose of the Study:

    The audit partner’s choice of his/her initial negotiation strategy with the client is an essential aspect of the audit, as the type of negotiation strategy influences variables such as the general approach of the negotiation, how it is enacted, the length, the dynamic of the auditor-client relationship, the likelihood of ultimate agreement, the final negotiation outcome, and the tone of future negotiations.  This study explores the impact of (1) the auditor’s assessment of the client’s initial accounting position flexibility (flexibility vs. firm preference) and (2) the nature of the auditor-client relationship (positive and cordial vs. negative and contentious) on the auditor’s selection of an initial negotiation strategy.  The authors consider the use of five negotiation strategies; the first three listed below are considered distributive (i.e., one party gains and one party loses) and the final two listed below are considered integrative (i.e., both parties can gain, or at least not lose):

    • Contending: a strategy that aims to provoke the other party to make concessions and/or resist analogous efforts by the other party. 
    •  Conceding: a strategy where one changes his/her position to provide less benefit for him/herself and more benefit for the other party in the negotiation.
    • Compromising: a hybrid strategy combining the contending and conceding negotiation strategies.  Essentially, both parties compromise, such that they jointly move from their ideal positions toward a “compromising” position. 
    • Problem Solving: a strategy entailing learning about the underlying motivations and interests of both parties and identifying new solutions to fulfill those motivations.  From the auditor’s perspective, this generally involves finding a solution that allows the auditor to maintain his/her original position, while allowing the client to feel that s/he achieved his/her objective.
    • Expanding the Agenda of Issues: this strategy entails increasing the number of issues to be negotiated, such that in the broad scheme of the negotiation, both the client and auditor have multiple opportunities to “win”.
    Design/Method/ Approach:

    The research evidence is collected prior to 2007.  The authors use a group of 140 audit partners from four international public accounting firms to complete a simulated negotiation task.  The audit partner receives information from the audit team manager regarding disagreements between the audit team and client about a potential overstatement of net income.  Specifically, net income is materially overstated, and some of the misstatements are clear-cut, while other misstatements are more subjective.  The audit partners are given a list of tactics they may choose to use in the negotiation, and asked to rate the likelihood that they would employ each tactic.  Each of the five possible negotiation strategies is represented by five tactics (resulting in twenty-five total possible tactics).  The authors also elicit from audit partners the extent of their commitment to the goal of substantially reducing the client’s net income.

    Findings:
    • Overall, audit partners are most likely to use integrative (vs. distributive) negotiation tactics – that is, they prefer strategies where both themselves and the client can gain (or at least not lose).  This finding is consistent with dual concern theory, which predicts that the integrative strategy is most beneficial in settings where negotiator is concerned with both the relationship and the outcome, as is the case in an audit environment.    
    • Audit partners use the “Contending” and “Problem Solving” negotiation tactics most frequently, followed by “Expanding the Agenda”.  The “Conceding” and “Compromising” strategies are unlikely to be used.    
    • The authors find that when the client’s initial accounting position is perceived to be inflexible, the audit partner is more likely to utilize the “Expanding the Agenda of Items” strategy and the “Contend” strategy, but is less likely to use the “Concede” and “Compromise” strategies.  
    • The authors find that when the client relationship is characterized as positive and cordial, audit partners are more likely to utilize the “Concede” strategy (but not the “Compromise” strategy, which the authors initially predicted).  However, the authors do not find support for their conjecture that when the client relationship is characterized as negative and contentious, audit partners are more likely to use the “Contend” strategy.
    • The authors find that when the client’s initial accounting position is perceived to be inflexible, the audit partner is more committed to achieving the goal of reducing net income substantially.  The authors also find weak support that audit partners are more committed to the goal of reducing net income when the client relationship is characterized as negative and contentious.
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management
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  • The Auditing Section
    The Effect of Auditors’ Use of a Reciprocity-Based S...
    research summary posted May 7, 2012 by The Auditing Section, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    The Effect of Auditors’ Use of a Reciprocity-Based Strategy on Auditor-Client Negotiations
    Practical Implications:

    The results of this study are important for audit firms to consider in designing their training and guidance for client negotiation. The results suggest that the concession approach leads to increased client satisfaction, retention, and better-negotiated outcomes. Thus, this approach may be useful in allowing the auditor to arrive at an outcome consistent with his/her initial, unstated position while maintaining an adequate relationship with management.

    Citation:

    Sanchez, M.H., C.P. Agoglia, and R.C. Hatfield. 2007. The Effect of Auditors’ Use of a Reciprocity-Based Strategy on Auditor-Client Negotiations. The Accounting Review 82 (1): 241-263.

    Keywords:
    Audit adjustment, negotiation, client satisfaction, client retention, audit differences, reciprocation
    Purpose of the Study:

    The authors collected evidence in the early to mid 2000s. Experiment 1A (using more “objective” audit adjustments) and experiment 1B (using more “subjective” audit adjustments) involve Controller and CFO participants solicited through a membership list provided by the Institute of Management Accountants. Participants in experiment 1A were randomly assigned to one of three conditions (high concession, low concession, and no concession), while participants in experiment 1B were randomly assigned to one of two conditions (high concession and low concession).  They completed a simulation of the negotiation process via email and recorded their willingness to post significant adjustments, their satisfaction with the auditor, and their likelihood of retaining the auditor. Experiment 2 involves audit managers and partners from large, international public accounting firms randomly assigned to the same three conditions as experiment 1A. Auditors recorded their perception of client satisfaction and retention.

    Design/Method/ Approach:

    The authors collected evidence in the early to mid 2000s. Experiment 1A (using more “objective” audit adjustments) and experiment 1B (using more “subjective” audit adjustments) involve Controller and CFO participants solicited through a membership list provided by the Institute of Management Accountants. Participants in experiment 1A were randomly assigned to one of three conditions (high concession, low concession, and no concession), while participants in experiment 1B were randomly assigned to one of two conditions (high concession and low concession).  They completed a simulation of the negotiation process via email and recorded their willingness to post significant adjustments, their satisfaction with the auditor, and their likelihood of retaining the auditor. Experiment 2 involves audit managers and partners from large, international public accounting firms randomly assigned to the same three conditions as experiment 1A. Auditors recorded their perception of client satisfaction and retention.

    Findings:
    • The authors find that the concession approach results in:
      • Higher willingness of client managers to post significant income-decreasing audit adjustments
      • Higher satisfaction of client managers with the auditor
      • Higher likelihood of client managers supporting retention 
    • The authors find that the above results are robust to the quantity of inconsequential audit differences waived. Specifically, there is no significant difference between client managers’ responses when two versus five inconsequential differences are presented. 
    • The authors find that the above results are also robust to the nature of significant audit differences negotiated (i.e., objective vs. subjective). 
    • Finally, the authors find that auditors believe in the efficacy of the concession approach. However, auditors believe that revealing a higher quantity of inconsequential items (five versus two) improves client satisfaction and auditor retention. As stated above, this finding is not consistent with actual client manager responses (Experiments 1A & 1B).
    Category:
    Engagement Management
    Sub-category:
    Interactions with Client Management
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  • Jennifer M Mueller-Phillips
    The Effect of Deadline Pressure on Pre‐Negotiation P...
    research summary posted January 20, 2016 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.01 Budgeting and Audit Time Management, 10.04 Interactions with Client Management 
    Title:
    The Effect of Deadline Pressure on Pre‐Negotiation Positions: A Comparison of Auditors and Client Management.
    Practical Implications:

    This paper provides a more complete analysis on the concessionary behaviors and planned negotiation tactics of both the auditors and the client management in the same negotiation context. The findings can improve auditor practitioners’ self-awareness in the audit adjustment negotiation process and help them better consider the effect of deadline pressure on negotiations. The result that auditors react differently than the clients under the deadline pressure is particularly useful for auditor practitioners to predict the behavior of their clients and to design effective negotiation trainings.  

    Citation:

    Bennett, G. B., R. C. Hatfield, and C. Stefaniak. 2015. The Effect of Deadline Pressure on PreNegotiation Positions: A Comparison of Auditors and Client Management. Contemporary Accounting Research 32 (4): 15071528.

    Keywords:
    pre-negotiation judgments, time pressure, auditor-client negotiation, concessionary behavior
    Purpose of the Study:

    Prior research on auditor-client negotiation mainly focuses on one side of the negotiation. This paper complements prior literature by comparing the pre-negotiation judgments: 1) initial positions and 2) concession behaviors between the auditors and their clients in the same negotiation setting. Because the recent regulatory change on accelerated deadlines of the SEC filings imposes time pressure on both parties, the authors further investigate whether the effect of deadline pressure on the two parties are different. The authors motivate their expectations based on an analysis of economic consequences, prior findings from the audit-client negotiation literature and the flexible rigidity hypothesis of negotiation behavior. Specifically, they examine whether:

    • The clients make more concessions in determining the pre-negotiation positions (i.e., rst oer, goal, and limit) than the auditors. The authors argue the clients will concede more because the costs of no agreement to the clients are substantially higher than the costs to the auditors. In addition, prior auditor-client negotiation research shows the auditors’ negotiation ranges are smaller than managers’ and the auditor concessionary behavior is limited by professionalism.
    • The increase in the pre-negotiation concession behavior due to time pressure is greater for the auditors than the clients. The general negotiation literature finds negotiation parties tend to concede more when time pressure increases. The authors argue the clients will not change their pre-negotiation strategy or positions that much under time pressure because they already expect to concede a greater amount than the auditors.
    Design/Method/ Approach:

    The authors collected the evidence via an experiment conducted during the early 2010s. The authors solicit auditors from the AICPA’s mailing lists and CFOs from an online repository of executive biographies to be the experiment participants and ask them to prepare for an upcoming negotiation about a disagreement on the inventory obsolescence account. The auditors (CFOs) first state their goal for the estimate, the minimum (maximum) amount to accept (i.e., limit), and their initial offer, and then indicate their preferences on specific negotiation tactics.

    Findings:
    • The authors find the concessions on the initial offer, goal estimate and limit are all greater for the CFOs than the auditors. This indicates the client management in general concede more than the auditors in pre-negotiation positions.
    • The authors find auditors concede more on the initial offer, goal estimate and limit in high time pressure state than in low time pressure state. On the contrary, the difference between the concession amounts in the two states is not significant for the management. This indicates when facing time pressure, auditors are likely to make more concessions and the increased concessions are greater than that of the management.
    • The authors find auditors like to use contentious (i.e., remaining firm) tactics in negotiations when time pressure is low but move away from these tactics when time pressure is high.
    Category:
    Engagement Management
    Sub-category:
    Budgeting & Audit Time Management, Interactions with Client Management
  • The Auditing Section
    The Effect of Magnitude of Audit Difference and Prior Client...
    research summary posted May 7, 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:
    The Effect of Magnitude of Audit Difference and Prior Client Concessions on Negotiations of Proposed Adjustments
    Practical Implications:

    The results of this study are important for auditors to consider because, ceteris paribus, the auditor’s proposed adjustment should not be affected by either the magnitude of the audit difference or prior concessions. The study demonstrates that even when auditors plan and execute quality audits, financial statement quality may suffer when high initial audit differences (client’s unaudited balance - auditor’s independent estimate) and/or prior client concessions exist due to unintentional bias in auditors’ proposed adjustments. Audit firms may want to consider providing formal training opportunities to address this bias and improve negotiation outcomes. Though further research is needed in this area, the authors suggest that the order in which misstatements are negotiated or resolved should be considered.

    Citation:

    Hatfield, R.C., R.W. Houston, C.M. Stefaniak, and S. Usrey. 2010. The Effect of Magnitude of Audit Difference and Prior Client Concessions on Negotiations of Proposed Adjustments. The Accounting Review 85 (5): 1647-1668.

    Keywords:
    Auditor negotiation, audit adjustments, accounting estimates, audit differences, client concessions
    Purpose of the Study:

    Auditors are required to remain skeptical of management’s estimates and form independent expectations in evaluating their reasonableness. When differences between the auditor’s expectations and management’s estimates exist, auditors must treat them as likely misstatements (SAS No. 107). Treatment as likely misstatements implies that the auditor must both propose and negotiate an adjustment with management. Auditors may not realize that their negotiation goals, limits, and initial position are likely affected by the magnitude of the difference between the client’s account balance and their own independent estimate. Additionally, the negotiation literature suggests that the existence of previously resolved misstatements may cause auditors to adopt an unintentionally biased position in subsequent negotiations. This paper examines whether auditor negotiations are negatively influenced by: 

    • The magnitude of the initial audit difference. Specifically, the authors test whether a large initial audit difference causes an unintentional downward bias in auditors’ negotiation goals, limits, and initial position.
    • The existence of a previously resolved misstatement (client concession). Specifically, the authors test whether the existence of a previously resolved objective misstatement causes an unintentional downward bias in auditors’ negotiation goals, limits, and initial position for a subsequent inventory valuation issue. 

    The authors’ expectations are derived from the negotiation literature pertaining to opening moves and reciprocity. In the audit environment, a client’s opening move may be considered the unaudited financial statements. Research demonstrates that when a counterpart’s initial demands are high, negotiators tend to lower their own expectations regarding the outcome of the negotiation, and thus adopt a negotiation position closer to their counterparts.  Similarly, due to the social norm of reciprocity, auditors might feel pressure to reduce the magnitude of their initial position when prior client concessions exist.

    Design/Method/ Approach:

    The research evidence was collected in the mid to late-2000s. Audit partners and managers from regional and Big-4 firms participated in the experiment. Participants electronically completed a simulated negotiation involving the existence of two audit issues: a subjective inventory valuation issue (obsolescence) and an objective accrual issue (quantitatively immaterial, but significant). Participants provided their negotiation goal, their negotiation limit (lowest acceptable balance), and their initial negotiation position. The final negotiation outcome was used as a dependent variable as well.

    Findings:
    • The authors find that auditors’ negotiation goal, negotiation limits, and initial negotiation position were significantly less when the magnitude of the initial audit difference was high, compared to when the magnitude was low.
    • The authors find that auditors’ negotiation goal, negotiation limits, and initial negotiation position were lower when a prior client concession existed, compared to when it did not. 
    • The authors find that both the magnitude of audit difference and prior concession affect the negotiation outcome through their influence on the auditor’s initial negotiation position.
    • The authors find that differences in confidence or perception of client’s strength in negotiation do not drive the above results.
    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
    The Effect of Past Client Relationship and Strength of the...
    research summary posted September 26, 2013 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    The Effect of Past Client Relationship and Strength of the Audit Committee on Auditor Negotiations
    Practical Implications:

    The authors note a number of implications for practitioners resulting from this study.  First, auditors need to be aware of the strength of the audit committee and the prior relationship with the client to determine potential dysfunctional results, particularly if dealing with a compromising client.  This could lead to making too large of a concession.  This study also shows the importance of having a strong audit committee and how that strength leads to having an auditor that is in a stronger position to negotiate.  However, it also shows the difficulty that can occur as a result of working on a client with a weaker audit committee.  Further, this study underscores the need to continue searching for other factors that may increase negotiation position in the event of a weak audit committee environment. 
     
    For more information on this study, please contact Helen L. Brown-Liburd.
     

    Citation:

    Brown-Liburd, H. L., and A. M. Wright. 2011. The Effect of Past Client Relationship and Strength of the Audit Committee on Auditor Negotiations. Auditing: A Journal of Practice & Theory 30 (4):51-69.

    Keywords:
    auditor negotiation; pre-negotiation planning; negotiation strategy; negotiation relationship; audit committee
    Purpose of the Study:

      The purpose of this study is to examine auditors in a pre-negotiation planning situation (i.e., situation where the auditor and client need to come to an agreement about how to treat an accounting issue).  This study is important because prior literature indicates that various contextual factors can be important.  The authors look at two of those factors, audit committee strength and prior negotiation relationships.  Audit committee strength has been shown to help in situations where management and the auditor disagree.  Further, audit committee strength is expected to increase the leverage an auditor has in these circumstances.  In addition, whether a client has been open to other opinions and arguments (i.e., compromising) or has been more insistent that their approach is the preferred position (i.e., contending) can impact auditor expectations about how this negotiation will progress.  This study extends existing literature by looking the effects of both factors when they interact with each other. 

    Design/Method/ Approach:

        The authors conducted an experiment including auditors (managers and partners) prior to November 2009.  The experiment manipulates audit committee strength (weak or strong) and prior client negotiation relationship (contending or compromising).  Participants are asked to read a case about a contentious but subjective issue and are asked to develop their preferred write-down, initial offer, range of acceptable write-downs, and to guess what the CFO’s position will be.  The experiment also simulated a negotiation with a computerized CFO to also determine level of concessions and final offers.

    Findings:
    • The authors find that auditors are most insistent about their preferred position when the strength of the audit committee is strong and when the past relationship with the CFO is also contending. 
    • While there is no difference between groups of the preferred inventory write-down, there are significant differences in the final offer and level of concession.
       
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Audit Scope & Materiality Judgements, Interactions with Client Management

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