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    Resolving Disputed Financial Reporting Issues: Effects of...
    research summary posted April 23, 2012 by The Auditing Section, last edited May 25, 2012, 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 
    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. 


    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.

    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.


    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
    Audit Team Composition, Engagement Management
    Diversity of Skill Sets (e.g. Tenure & Experience), Interactions with Client Management
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