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.

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.

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.

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.

• 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.

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. 

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.

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.

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.

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

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.  

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.

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”.

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.

• 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.

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.  

Bennett, G. B., R. C. Hatfield, and C. Stefaniak. 2015. The Effect of Deadline Pressure on Pre‐Negotiation Positions: A Comparison of Auditors and Client Management. Contemporary Accounting Research 32 (4): 1507–1528.

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., first offer, 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.

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.

• 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.

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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.
 

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.

  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. 

    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.

• 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.
   

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