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    Effect of Concession-Timing Strategies in Auditor–Client N...
    research summary posted January 20, 2016 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 10.0 Engagement Management, 10.04 Interactions with Client Management 
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    Title:
    Effect of Concession-Timing Strategies in Auditor–Client Negotiations: It Matters Who Is Using Them.
    Practical Implications:

    The results of this paper are of interests to both the management and the auditors in practice. While there are various concession-timing strategies, it is normal for the auditors to make a large concession towards the end of the negotiation and for the management to make a large concession at the start of the negotiation. Violating these norms will lead to ineffective outcomes. However, both the parties can make small, gradual concessions along the negotiation process and this gradual strategy will lead to the most effective outcomes. The findings can be generalized to other negotiation settings, such as the negotiation between the buyer and seller in transfer pricing settings.

    Citation:

    Sun, Y., H. T. Tan, and J. Zhang. 2015. Effect of ConcessionTiming Strategies in AuditorClient Negotiations: It Matters Who Is Using Them. Contemporary Accounting Research 32 (4): 14891506.

    Keywords:
    negotiation strategies, auditors, financial managers, norms
    Purpose of the Study:

    There are three types of concession-timing strategies available to the auditors and the management in an audit adjustment negotiation: 1) start strategy- offer large concessions only at the beginning of the negotiation; 2) end strategy - offer large concessions only near the end of the negotiation; and 3) gradual strategy  offer small, gradual and reciprocal concessions along the negotiation process. The paper first considers the norms on who should use certain types of the strategies and then investigate whether norm-violation will render the negotiation strategy ineffective. Specifically, the authors expect it is the norms for the auditors to adopt either the start strategy or the gradual strategy and for the management to adopt either the end strategy or the gradual strategy. Norm-inconsistent behaviors mean the auditors use the start strategy and the management use the end strategy.

    General negotiation studies have examined the effectiveness of the three concession-timing strategies but those studies neither examine party-specific effectiveness nor consider reactions from the counter-party. The purpose of this paper is to take those considerations into account and examine the norm effect in an auditor-client negotiation context.

    Design/Method/ Approach:

    The authors collected the evidence via an experiment conducted in China during the early 2010s. A group of auditors from the Big 4 accounting firms and a group of financial managers participate in the experiment. The audit disagreement is related to an impairment charge. Through manipulating the negotiation strategies of the hypothetical counter-party, the authors record the concession amounts made by the auditors and the financial managers respectively.

    Findings:
    • The authors find the financial manager participants concede more if the hypothetical auditors adopt either the start or the gradual strategy and the two strategies does not have significant different impacts on the concession amounts.  
    • The authors find the auditor participants concede more if the hypothetical financial managers adopt either the start or the gradual strategy but the impact on the concession amounts is greater for the gradual strategy than the start strategy.
    • The authors also find the financial manager participants and auditor participants response with less norm-consistent behaviors if the hypothetical counter-party adopts a norm-inconsistent strategy.
    • The authors elicit the beliefs of the financial manager participants and the auditor participants about the norms on the use of specific strategies. They find evidence consistent with their expectations. Specifically, the general beliefs from both parties are that the auditors should adopt either the end or the gradual strategy and the managers should adopt either the start or the gradual strategy.
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Interactions with Client Management