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    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 
    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.


    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.

    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.

    • 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.
    Auditor Judgment, Engagement Management
    Audit Scope & Materiality Judgements, Interactions with Client Management