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  • Jennifer M Mueller-Phillips
    The Impact of the Timing of a Prior Year’s Auditor C...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Impact of the Timing of a Prior Year’s Auditor Concessions on Financial Officers’ Judgments
    Practical Implications:

    The authors examine an important aspect of audit-client history and provide evidence on how the timing of auditor concessions in one period affects financial officers’ negotiation judgments in the subsequent period. They also show the importance of incorporating this variable into auditor-client negotiation studies. 

    Citation:

    Cheng, M. M., H. T. Tan, K. T. Trotman, and A. Tse. 2017. The Impact of the Timing of a Prior Year’s Auditor Concessions on Financial Officers’ Judgments. Auditing: A Journal of Practice and Theory 36 (1): 43 – 62. 

    Keywords:
    auditor-client negotiations, negotiation strategy, concession timing and negotiation history
    Purpose of the Study:

    Auditors and clients frequently engage in negotiations to resolve disagreements over financial reporting decisions. These negotiations ultimately lead to concessions being made either by the auditor, the client, or both. Existing research delves into the effect of strategies employed during negotiations in the current period, but this study differs by examining multi-period effects of negotiation strategies. Specifically, the authors consider the impact of negotiation history by investigating three concession timing strategies (concession-start, concession-end, and gradual concession) used by auditors in the previous negotiation period and their effect on financial officers’ negotiation judgments for the current year audit.  

    Design/Method/ Approach:

    The authors conduct an experiment where financial officers made negotiation judgments after receiving information about an auditor’s negotiation behavior in the prior year. 

    Findings:
    • The authors find that financial officers expect a larger ultimate income-decreasing write-down and expect to provide more concessions to the auditor if their auditors had used a concession-start strategy rather than a concession-end strategy in the prior year.
    • The authors find support for a mediation model in which an auditor’s prior-period concession provided at the end (rather than the start) of the negotiation positively increases managers’ expected ultimate write-down, which then positively affects their satisfaction with the negotiation outcome; in turn, negotiation outcome positively influences manager’s intention to continue a future relationship with the auditor. 
    Category:
    Engagement Management
    Sub-category:
    Interactions with Client Management
  • Jennifer M Mueller-Phillips
    Concession, Contention, and Accountability in Auditor-Client...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Concession, Contention, and Accountability in Auditor-Client Negotiations
    Practical Implications:

    This paper extends previous work by examining how clients’ use of contending tactics affect auditors’ decisions during a negotiation, which separates itself from the research of the past by investigating the clients’ current negotiation tactics, not the tactics of the past. This paper also introduces the level-of-aspiration theory into consideration for auditor negotiation literature.

    Citation:

    Bergner, J. M., S. A. Peffer and R. J. Ramsay. 2016. Concession, Contention, and Accountability in Auditor-Client Negotiations. Behavioral Research in Accounting 28 (1): 15-25

    Keywords:
    auditor-client negotiations, accountability, concurring partner review, and level-of-aspiration theory.
    Purpose of the Study:

    This study focuses on investigating how tactics employed by a client during negotiations impact experienced auditors’ propensity to waive material adjustments and whether the salience of a concurring partner review (CPR) can affect these negotiations. The audit profession as a whole remains fixated upon auditor independence and financial statement quality, so it is important to examine potential tactics by a client since negotiations directly affect the resulting financial statements. The authors of this study hope to expound upon existing literature by examining how a client who is concessionary or contentious during the negotiation may affect its outcome. In addition, they study whether a CPR reduces auditors’ propensities to waive material adjustments. 

    Design/Method/ Approach:

    The authors conduct an online experiment in which auditors make decisions about the audit of a hypothetical client. They manipulate two independent variables: client tactics and CPR salience.

    Findings:
    • The authors find that auditors are more likely to waive material adjustments when clients use contending tactics during negotiations. This particular results varies from previous studies that examined negotiation outcomes involving contentious clients. The former studies examine pre-negotiation situations where the client has been contentious in the past, this study finds that auditors react differently when the client is being contentious during the current negotiation.
    • The authors find that the level-of-aspiration (LOA) theory may describe auditors’ decisions regarding contentious clients. Reciprocity theory has been used in the past but does not explain these results. Reciprocity theory predicts that auditors will respond to a contentious client by becoming more contentious, while LOA predicts the opposite. Because this study finds that the auditor conceded to the wishes of the contentious client, the results follow LOA.
    • The authors find that the presence of an existing quality control procedure mitigates the auditors’ propensity to waive material adjustments.
    Category:
    Audit Quality & Quality Control, Engagement Management
    Sub-category:
    Interactions with Client Management, Management/Staff Interaction
  • Jennifer M Mueller-Phillips
    Managers’ Strategic Reporting Judgments in Audit N...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management, 13.0 Governance, 13.05 Board/Audit Committee Oversight, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Managers’ Strategic Reporting Judgments in Audit Negotiations
    Practical Implications:

     The results of this study are important to consider when examining the effects of the audit committee on managers’ judgments. This study identifies the changes to the reporting environment stemming from the implementation of SOX, particularly with respect to communications between auditors and the audit committee and the authority and responsibility of the audit committee. This study adds insight to prior archival research that suggests that audit committees considered to be effective are associated with greater financial reporting quality. Further, these findings suggest that managers act as if auditors and audit committees that jointly resist management pressures to engage in aggressive reporting play important roles in ensuring high financial reporting quality.

    Citation:

     Brown-Liburd, H., A. Wright and V. Zamora. 2016. Managers’ Strategic Reporting Judgments in Audit Negotiations. Auditing, A Journal of Practice and Theory 35 (2): 47-64.

    Keywords:
    Audit negotiation, past counterpart relationship, audit committee oversight
    Purpose of the Study:

     Prior research has largely characterized audit issue negotiations as a dyadic relationship between auditors and managers. However, the Sarbanes Oxley Act (SOX) substantially enhanced the audit committee’s oversight responsibilities for the financial reporting and auditing process. Thus, negotiations post-SOX may be viewed as a triadic relationship involving managers, auditors, and the audit committee. Differing judgments between auditors during negotiations and managers during financial reporting exist because they have different perspectives and incentives. Whereas managers’ incentives relate to maximizing financial reporting outcomes while maintaining the firm’s reporting reputation, auditors’ incentives relate to fostering a functioning working relationship with the client while appropriately attesting to the financial statements. These differences in perspectives and incentives yield contrasting expectations of negotiation judgments for auditors and managers. This study seeks to examine the joint effects of past auditor-client negotiations and audit committee strength on management’s strategic reporting judgments.

    Design/Method/ Approach:

     The authors recruited participants from an executive training session attended by CFOs/controllers and held at a large public university in the southeastern U.S. During a controlled experiment, participants completed the hard copy experimental case. Participants engaged in planning for an upcoming audit negotiation involving a subjective estimate for an inventory write down due to obsolescence. The authors asked participants to identify their initial offer and their perception of the negotiated ultimate final outcome. Audit committee strength was manipulated as either weak or strong. The nature of past auditor-client negotiations over “grey” misstatements was manipulated as either contentious or cooperative.

    Findings:

    The results are consistent with a strong combined effect of the roles of both the auditor and the audit committee in managers’ pre-negotiation judgments.

    • The presence of both strong audit committee oversight and an auditor that has been contentious in past negotiations together significantly constrain managers’ aggressive reporting.
    • The presence of weak audit committee oversight and an auditor that has been cooperative in past negotiations jointly provide the opportunity for managers to engage in more aggressive reporting.
    • Managers report less aggressively in the presence of a contentious auditor and strong oversight by the audit committee to ensure timely resolution and protect the firm’s financial reporting reputation, and to minimize the risk that the audit committee will intervene against the managers’ favor.
    • Managers report more aggressively in consideration of his/her relative bargaining power against a cooperative auditor who appears to have high relationship concerns, along with weak oversight by the audit committee that is passive/persuadable. 
    Category:
    Corporate Matters, Engagement Management, Governance
    Sub-category:
    Audit Committee Effectiveness, Board/Audit Committee Oversight, Interactions with Client Management
  • Jennifer M Mueller-Phillips
    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 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    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
  • Jennifer M Mueller-Phillips
    The Effect of Deadline Pressure on Pre‐Negotiation P...
    research summary posted January 20, 2016 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.01 Budgeting and Audit Time Management, 10.04 Interactions with Client Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effect of Deadline Pressure on Pre‐Negotiation Positions: A Comparison of Auditors and Client Management.
    Practical Implications:

    This paper provides a more complete analysis on the concessionary behaviors and planned negotiation tactics of both the auditors and the client management in the same negotiation context. The findings can improve auditor practitioners’ self-awareness in the audit adjustment negotiation process and help them better consider the effect of deadline pressure on negotiations. The result that auditors react differently than the clients under the deadline pressure is particularly useful for auditor practitioners to predict the behavior of their clients and to design effective negotiation trainings.  

    Citation:

    Bennett, G. B., R. C. Hatfield, and C. Stefaniak. 2015. The Effect of Deadline Pressure on PreNegotiation Positions: A Comparison of Auditors and Client Management. Contemporary Accounting Research 32 (4): 15071528.

    Keywords:
    pre-negotiation judgments, time pressure, auditor-client negotiation, concessionary behavior
    Purpose of the Study:

    Prior research on auditor-client negotiation mainly focuses on one side of the negotiation. This paper complements prior literature by comparing the pre-negotiation judgments: 1) initial positions and 2) concession behaviors between the auditors and their clients in the same negotiation setting. Because the recent regulatory change on accelerated deadlines of the SEC filings imposes time pressure on both parties, the authors further investigate whether the effect of deadline pressure on the two parties are different. The authors motivate their expectations based on an analysis of economic consequences, prior findings from the audit-client negotiation literature and the flexible rigidity hypothesis of negotiation behavior. Specifically, they examine whether:

    • The clients make more concessions in determining the pre-negotiation positions (i.e., rst oer, goal, and limit) than the auditors. The authors argue the clients will concede more because the costs of no agreement to the clients are substantially higher than the costs to the auditors. In addition, prior auditor-client negotiation research shows the auditors’ negotiation ranges are smaller than managers’ and the auditor concessionary behavior is limited by professionalism.
    • The increase in the pre-negotiation concession behavior due to time pressure is greater for the auditors than the clients. The general negotiation literature finds negotiation parties tend to concede more when time pressure increases. The authors argue the clients will not change their pre-negotiation strategy or positions that much under time pressure because they already expect to concede a greater amount than the auditors.
    Design/Method/ Approach:

    The authors collected the evidence via an experiment conducted during the early 2010s. The authors solicit auditors from the AICPA’s mailing lists and CFOs from an online repository of executive biographies to be the experiment participants and ask them to prepare for an upcoming negotiation about a disagreement on the inventory obsolescence account. The auditors (CFOs) first state their goal for the estimate, the minimum (maximum) amount to accept (i.e., limit), and their initial offer, and then indicate their preferences on specific negotiation tactics.

    Findings:
    • The authors find the concessions on the initial offer, goal estimate and limit are all greater for the CFOs than the auditors. This indicates the client management in general concede more than the auditors in pre-negotiation positions.
    • The authors find auditors concede more on the initial offer, goal estimate and limit in high time pressure state than in low time pressure state. On the contrary, the difference between the concession amounts in the two states is not significant for the management. This indicates when facing time pressure, auditors are likely to make more concessions and the increased concessions are greater than that of the management.
    • The authors find auditors like to use contentious (i.e., remaining firm) tactics in negotiations when time pressure is low but move away from these tactics when time pressure is high.
    Category:
    Engagement Management
    Sub-category:
    Budgeting & Audit Time Management, Interactions with Client Management
  • Jennifer M Mueller-Phillips
    Technology-Facilitated Contribution Behavior: An...
    research summary posted July 20, 2015 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.03 Interaction among Team Members, 10.04 Interactions with Client Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Technology-Facilitated Contribution Behavior: An Experimental Investigation.
    Practical Implications:

    The results speak to the importance of recruiting competent professionals to the workforce and making specific requests for assistance that include required deliverables. As individuals build confidence in their expertise and understand exactly how to assist, they will be able to provide higher-quality responses to share knowledge. This study extends the literature by operationalizing and studying mediating mechanisms to motivation to contribute and contribution quality separately. This study extends this research in an experimental setting to analyze factors expected to affect the motivation to contribute and contribution quality. By incorporating a collaboration platform included in the Microsoft Office Suite (i.e., a single technology), the effect of technology was controlled in the research design.

    Citation:

    Du, H., Lehmann, C. M., & Willson, V. L. 2014. Technology-Facilitated Contribution Behavior: An Experimental Investigation. Behavioral Research In Accounting 26 (2): 97-130.

    Keywords:
    collaboration, contribution behavior, motivation to contribute, response quality
    Purpose of the Study:

    Contribution behavior is described as voluntarily providing assistance or sharing knowledge when a colleague makes a request for assistance. The importance of knowledge sharing, specifically in the form of contribution behavior is an area of interest to accounting professionals. An inability or unwillingness to share professional knowledge and expertise within an accounting firm can lead to lower-quality or less-efficient audits. The purpose of this study is to examine the motivation to contribute but also examines contribution quality. This study also evaluates the mediating mechanisms of knowledge about the individual requesting assistance, the expertise level of the contributor, and the specificity of the request in the motivation to contribute, as well as the contribution quality.

    Design/Method/ Approach:

    The theoretic research model is structured to focus on the three key elements in contribution behavior: awareness, searching and matching, and formulation and delivery. The experiment was designed using a collaboration application that is included in the Microsoft Office Suite. One hundred eighty-three graduate and undergraduate students enrolled in Accounting Information Systems classes (both graduate and undergraduate levels) and a graduate IT Auditing class at a large commuter university served as participants in this study. The evidence was gathered prior to April 2014.

    Findings:

    While knowledge about a requester motivates the individual to contribute and the individual’s prior positive experience with the requester enhances the motivation, the individual’s expertise level on domain knowledge and the specificity of request are not associated with motivation to contribute. However, with regard to contribution quality, domain knowledge and specificity of request are positively associated with higher contribution quality, making these mediating effects pronounced in contribution quality, but not in motivation to contribute.

    The results indicate that individuals are more motivated to respond to a request for assistance if they feel at ease with the requester. Their domain knowledge and the specificity of a request further improve the contribution quality. The implications of this study point to the importance of developing a collegial and interactive environment in which professionals are more likely to share knowledge to help each other. Creating opportunities for friendly and positive experiences with colleagues encourages employees to respond to requests for assistance. Accounting firms can foster an environment that promotes contribution behavior by developing cooperative and positive relationships among employees so that when someone needs help, there is a higher likelihood that there will be responses because of familiarity with the requesting colleagues. Moreover, the professional’s expertise level or domain knowledge and the specificity of the request are relevant. While not directly related to the motivation to assist the requester, expertise and specificity of the request are associated with the contribution quality.

    Category:
    Engagement Management
    Sub-category:
    Interaction among Team Members, Interactions with Client Management
  • Jennifer M Mueller-Phillips
    Do Manages Intend to Use the Same Negotiation Strategies as...
    research summary posted November 5, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Do Manages Intend to Use the Same Negotiation Strategies as Partners?
    Practical Implications:

    The findings of this study are important for audit firms to consider when resolving financial reporting issues with client management. The overall pattern of our results illustrates that audit managers and audit partners intend to use different negotiation strategies and, therefore, substituting managers for partners in order to increase audit efficiency may in some contexts undermine audit effectiveness. Indeed, concern is warranted based on these results that suggest that a manager’s intended strategy entering negotiations with client management may be, pending context, substantially different and more client-outcome-oriented than the partners’ intended strategy would be. This could be worrisome for audit partners if they are not aware of negotiations that managers are undertaking on their own while out in the field. From a practice perspective, partners need to be aware of circumstances where managers negotiate with client management, since the tactics employed and potentially the outcomes obtained by the manager may be different than if the partner had been involved. Thus, based on our findings, audit partners may be the more effective negotiators and, thus, will have better negotiated outcomes than less experienced managers.

     

    For more information on this study, please contact Susan McCracken.

    Citation:

    McCracken, S., S.E. Salterio, and R.N. Schmidt. 2011. Do managers intend to use the same negotiation strategies as partners? Behavioral Research in Accounting 23 (1): 131-160.

    Keywords:
    Negotiation, strategy, experience, power, surrogate, auditor
    Purpose of the Study:

    Auditor-client management (ACM) negotiations frequently occur between the audit partner and the Chief Financial Officer, but there is also evidence that the audit manager attempts to negotiate resolutions to issues in order to increase audit efficiency, to increase the manager’s image of competence with the partner or in response to time pressures. Given the importance of ACM negotiations to the resulting financial statements shown in previous work in the ACM negotiation area, as well as the tendency for managers to conduct these negotiations in place of the partners, it is important to determine whether partners and managers intend to utilize similar or different negotiation strategies. From a practice perspective, if audit partners’ and managers’ intended negotiation strategies are different, then audit effectiveness may be compromised when managers undertake ACM negotiations. However, if the intended negotiation strategies of the partner and manager are the same, then there would be evidence to suggest that improvements in audit efficiency may be achieved by having managers undertake the ACM negotiations. Furthermore, from a research perspective, if there are differences in intended negotiation strategies between partners and managers, then results from prior studies that utilize managers as participants may not generalize to audit partners.

    Design/Method/ Approach:

    The experimental research evidence was collected in 2005. The authors measured the level of auditor participants (audit manager or audit partner) and manipulated the client management’s initial accounting position flexibility and ACM relationship in the experimental case context. After reading the case, participants were asked to indicate their likelihood of employing each of the 25 tactics related to the five negotiation strategies (expanding the agenda, problem solving, contending, compromising and conceding) in an upcoming negotiation with the client.

    Findings:
    • The integrative strategies’ results show that partners are less likely than managers to use the integrative strategy “expanding the agenda”. While less conclusive, our results also suggest that partners are less likely than mangers to use the integrative strategy “problem solving”. We find that this difference in planned strategy is not due to years of experience, but rather both of these findings are consistent with the power/status theory in the generic negotiation literature.
    • The distributive strategies’ results show that managers are less likely to use the contending strategy and more likely to use the concessionary and compromising strategies than partners. Our conclusions, however, must be qualified by the interaction of level with the accounting context factors embedded in the experimental case (prior client relationship and flexibility of client’s initial accounting position). An exception is the less commonly used concessionary strategy where we find managers are more likely to intend to use this strategy than the partners, irrespective of the accounting context. When examining the pattern of the interactions, we see a greater reaction to the accounting context by the partners than by the managers, again, likely due to partners’ greater experience and power/status in negotiations
    Category:
    Audit Quality & Quality Control, Engagement Management
    Sub-category:
    Interactions with Client Management, Sustainability ServicesTraining & General Experience
  • Jennifer M Mueller-Phillips
    Auditor Perceptions of Client Narcissism as a Fraud Attitude...
    research summary posted June 7, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.04 Management Integrity, 10.0 Engagement Management, 10.04 Interactions with Client Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Auditor Perceptions of Client Narcissism as a Fraud Attitude Risk Factor
    Practical Implications:

    The results of this study offer initial evidence that manager narcissism is an observable measure of elevated fraud risk. These findings have clear implications for audit practice. The results suggest that auditors are aware of the link between client narcissism and increased fraud attitude risk. Public accounting firms should emphasize the linkage between specific client manager personality traits and the increased likelihood of fraud-related behaviors in fraud risk assessment training. This study may also be useful to standard setters and auditing firms as a means to improve professional guidance regarding how to assess fraud attitude and the resulting effect on auditors’ fraud risk assessments.  

    Citation:

    Johnson, E. N., J. R. Kuhn, B. A. Apostolou, and J. M. Hassell. 2013. Auditor Perceptions of Client Narcissism as a Fraud Attitude Risk Factor. Auditing 32 (1).

    Keywords:
    attitude/rationalization; fraudulent financial reporting; narcissism; risk assessment
    Purpose of the Study:

    Despite increased emphasis on fraud detection in the auditing standards since the passage of the Sarbanes-Oxley Act of 2002, fraudulent financial reporting continues to be a serious concern. Auditing standards state that the auditor should consider client management’s attitude toward fraud when making fraud risk assessments. Very little guidance, however, is provided in the auditing standards or existing fraud literature on observable indicators of fraud attitude. This study tests whether observable indicators of narcissism, a personality trait linked to unethical and fraudulent behavior, is viewed by auditors as an indicator of increased fraud attitude risk. 

    Design/Method/ Approach:

    The authors developed an audit judgment case scenario that included specific indications of client fraud attitude and fraud motivation. Narcissism and motivation were each manipulated at two levels (high or low) in a 2 X 2 design. Participants selected were 101 practicing auditors from several U.S. offices of a large international public accounting firm. The data was collected in an experimental setting, where the participants were randomly assigned to one of four possible experimental conditions and individually completed the experimental materials. Responses were gathered through a combination of: (1) “live” administration at firm training events attended by the researchers; and (2) mail responses, where the managing partners of four firm offices agreed to distribute questionnaires and coordinate their completion and return. The overall goal was an initial experiment of client narcissism as a fraud risk factor in an audit context. 

    Findings:
    • Results indicate a narcissism effect, with significantly higher assessments of fraud risk when a client manager was described as exhibiting narcissistic characteristics. 
    • Auditors assessed fraud risk as significantly higher in the presence of motivations for the client manager to commit fraud.
    • Narcissism did not interact with fraud motivation in influencing auditor fraud risk judgments; high levels of either fraud attitude risk or fraud motivation risk were sufficient to increase auditors’ fraud risk assessments.
    Category:
    Engagement Management, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Assessment, Interactions with Client Management, Management Integrity
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  • Jennifer M Mueller-Phillips
    Auditor Commitment to Privately Held Clients and its Effect...
    research summary posted May 25, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Auditor Commitment to Privately Held Clients and its Effect on Value-Added Audit Service
    Practical Implications:

    The results of this study highlight the important role that perceptions of client fairness play in endangering social exchange relationships between individual auditors and clients. Client commitment, endangered by perceived client fairness and support, can result in higher levels of value-added audit service. This study also has practical implications for accounting firms. Firms can encourage clients to treat their auditors fairly by including language in the engagement letter describing the importance of the timely provision of audit request, adequate working conditions, and other efforts to ensure a smooth audit process. Future research could also examine the costs and benefits associated with value-added audit service from the client’s perspective.  

    Citation:

    Herda, D. N., and J. J. Lavelle. 2013. Auditor Commitment to Privately Held Clients and its Effect on Value-Added Audit Service. Auditing 32 (1).

    Keywords:
    management letter; organizational commitment; social exchange theory; value-added audit service
    Purpose of the Study:

    Value-added audit service, defined as client-service activities resulting from an audit that are not directly related to verifying the financial statements, provide important benefits for both clients and audit firms. Examples of these activities include auditor advice and feedback on accounting, internal controls, and general business issues. The purpose of this study is to examine how social exchange relationships between individual auditors and their clients affect the extent to which auditors provide clients with value-added audit service. The authors focus on auditor commitment to clients as an attitudinal indicator of a high-quality social exchange relationship between auditors and clients as a predicator of value-added audit service. 

    Design/Method/ Approach:

    The authors use a research model that is based on social exchange theory. Email surveys were sent out to auditors by the firms at the request of the authors. Responses were collected in the spring of 2011, after the traditional audit busy season. The final sample used consists of 204 auditor responses at two public accounting firms that principally serve privately held clients.

    Findings:
    • Perceived fair treatment from clients endangers a social exchange relationship between auditors and their clients, leading to an increased level of client service.
    • Perceived fairness on the part of the audit client leads to perceived support from the client, perceived client support leads to client commitment, and client commitment results in increased value-added service.  
    • Client commitment is positively associated with the extent of value-added audit service provided to the client
    Category:
    Engagement Management
    Sub-category:
    Interactions with Client Management
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  • Jennifer M Mueller-Phillips
    The Effect of the Social Mismatch between Staff Auditors and...
    research summary posted April 17, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 10.0 Engagement Management, 10.04 Interactions with Client Management, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effect of the Social Mismatch between Staff Auditors and Client Management on the Collection of Audit Evidence
    Practical Implications:

    Given the extent of audit evidence collected by young staff auditors, the findings of this study have direct implications for workpaper and audit quality. The mismatch of age, experience, and knowledge between staff-level auditors and client management can result in a potentially intimidating situation for the staff-level auditor, and impact decisions made in collecting information and conducting testwork. These results provide new evidence regarding the impact of auditor-client interactions on audit quality. This suggests that firms may want to consider how to manage these social mismatches of their staff.

    For more information on this study, please contact G. Bradley Bennett.
     

    Citation:

    Bennett, G. B., and R. C. Hatfield. 2013. The Effect of the Social Mismatch between Staff Auditors and Client Management on the Collection of Audit Evidence. The Accounting Review 88 (1): 31–50.

    Keywords:
    audit documentation; audit environment; audit evidence; audit quality; auditor-client relationship; intimidation; staff-level auditor
    Purpose of the Study:

    This study analyzes social interactions between staff-level auditors and client management to determine how differences in perceptions may influence decisions regarding the collection of audit evidence. During fieldwork, staff-level auditors have extensive interaction with client management, and evidence suggests these auditors are often socially “mismatched” with client management, in terms of their experience, age, and accounting knowledge. Concerns exist over these staff-level auditors’ desires to avoid the interactions and how it may affect the amount of audit evidence collected. The authors of this study attempt to determine the overall effects of these relationships.

    Design/Method/ Approach:

    Surveys were conducted to gather evidence about audit staff interactions with client management. The results of these studies were used to develop and experiment. Graduate auditing students with approximately 2.5 months average internship experience over one busy season were considered an appropriate and practical proxy for staff-level auditors with minimal experience. Participants in the experiment included 138 Master’s of Accountancy students, 52 percent female and 48 percent male, from a large state university in the Southeast. Participants in the experiment were put into a simulated work environment and asked to review accounts receivable confirmations in which additional information was needed from the client’s controller. Results of the experiment were used to determine the participant’s perception of the audit client and their ability to collect sufficient audit evidence.

    Findings:
    • Social differences between staff-level auditors and client management reduce the likelihood that staff-level auditors will request additional audit evidence via face-to-face meetings with the audit client.
    • Client’s explicit behavior to intimidate the auditor does not necessarily result in a difference in auditor behavior.
    • Allowing participants to request evidence via email increased the likelihood that such evidence was requested.
    • Participants often document their findings in such a way as to minimalize the chance of a reviewer identifying the issue.
       
    Category:
    Audit Quality & Quality Control, Auditor Judgment, Engagement Management
    Sub-category:
    Adequacy of Evidence, Interactions with Client Management, Management/Staff Interaction