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    The Auditor’s Strategy Selection for Negotiation with M...
    research summary posted May 4, 2012 by The Auditing Section, last edited May 25, 2012, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management 
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    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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