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    The Effect of Auditors’ Use of a Reciprocity-Based S...
    research summary posted May 7, 2012 by The Auditing Section, last edited May 25, 2012, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management 
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    Title:
    The Effect of Auditors’ Use of a Reciprocity-Based Strategy on Auditor-Client Negotiations
    Practical Implications:

    The results of this study are important for audit firms to consider in designing their training and guidance for client negotiation. The results suggest that the concession approach leads to increased client satisfaction, retention, and better-negotiated outcomes. Thus, this approach may be useful in allowing the auditor to arrive at an outcome consistent with his/her initial, unstated position while maintaining an adequate relationship with management.

    Citation:

    Sanchez, M.H., C.P. Agoglia, and R.C. Hatfield. 2007. The Effect of Auditors’ Use of a Reciprocity-Based Strategy on Auditor-Client Negotiations. The Accounting Review 82 (1): 241-263.

    Keywords:
    Audit adjustment, negotiation, client satisfaction, client retention, audit differences, reciprocation
    Purpose of the Study:

    The authors collected evidence in the early to mid 2000s. Experiment 1A (using more “objective” audit adjustments) and experiment 1B (using more “subjective” audit adjustments) involve Controller and CFO participants solicited through a membership list provided by the Institute of Management Accountants. Participants in experiment 1A were randomly assigned to one of three conditions (high concession, low concession, and no concession), while participants in experiment 1B were randomly assigned to one of two conditions (high concession and low concession).  They completed a simulation of the negotiation process via email and recorded their willingness to post significant adjustments, their satisfaction with the auditor, and their likelihood of retaining the auditor. Experiment 2 involves audit managers and partners from large, international public accounting firms randomly assigned to the same three conditions as experiment 1A. Auditors recorded their perception of client satisfaction and retention.

    Design/Method/ Approach:

    The authors collected evidence in the early to mid 2000s. Experiment 1A (using more “objective” audit adjustments) and experiment 1B (using more “subjective” audit adjustments) involve Controller and CFO participants solicited through a membership list provided by the Institute of Management Accountants. Participants in experiment 1A were randomly assigned to one of three conditions (high concession, low concession, and no concession), while participants in experiment 1B were randomly assigned to one of two conditions (high concession and low concession).  They completed a simulation of the negotiation process via email and recorded their willingness to post significant adjustments, their satisfaction with the auditor, and their likelihood of retaining the auditor. Experiment 2 involves audit managers and partners from large, international public accounting firms randomly assigned to the same three conditions as experiment 1A. Auditors recorded their perception of client satisfaction and retention.

    Findings:
    • The authors find that the concession approach results in:
      • Higher willingness of client managers to post significant income-decreasing audit adjustments
      • Higher satisfaction of client managers with the auditor
      • Higher likelihood of client managers supporting retention 
    • The authors find that the above results are robust to the quantity of inconsequential audit differences waived. Specifically, there is no significant difference between client managers’ responses when two versus five inconsequential differences are presented. 
    • The authors find that the above results are also robust to the nature of significant audit differences negotiated (i.e., objective vs. subjective). 
    • Finally, the authors find that auditors believe in the efficacy of the concession approach. However, auditors believe that revealing a higher quantity of inconsequential items (five versus two) improves client satisfaction and auditor retention. As stated above, this finding is not consistent with actual client manager responses (Experiments 1A & 1B).
    Category:
    Engagement Management
    Sub-category:
    Interactions with Client Management
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