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  • 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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  • 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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  • 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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  • 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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  • 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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