The Effect of Deadline Pressure on Pre‐Negotiation Positions: A Comparison of Auditors and Client Management

Abstract

This study compares auditors' and CFOs' pre-negotiation judgments and considers the potential differential impact the end of the audit (deadline pressure) has on each party. General negotiation literature suggests that individuals change their behaviors as deadline pressure increases (i.e., when there is less time in which to conduct a negotiation) in order to increase the probability of reaching an agreement. In an audit context, the end-of-engagement deadline is often based on regulatory filing deadlines (e.g., SEC filings for public companies), which are not determined by either negotiating party. The audit context is also unique in that there are asymmetric consequences for each party (the auditor and client management) for failing to reach an agreement and different negotiation tactics used by the two parties potentially leading to differing levels of concessions. We predict that auditors, who are in a stronger negotiation position, will generally concede less than client management when determining their pre-negotiation position and will tend to use more contentious strategies. However, such contentious strategies require time. Thus we expect, based on negotiation theory, that as deadline pressure increases, auditors' concessionary behavior will be more affected than that of client management. Consistent with expectations, results of our experiment suggest that CFOs concede more than auditors in general; however, auditors are more reactive to deadline pressure and increase concessions when faced with high deadline pressure, while CFOs do not. We also measure planned strategy use and find results to be consistent with theory: when deadline pressure is high, auditors are less likely to use contentious tactics, while CFOs' strategy choices are unaffected by deadline pressure. These results suggest that characteristics of the unique auditor-client negotiation environment, such as deadline pressures, have potentially differential effects on both parties due to the differing negotiation strategies employed by these parties.

Audit time pressure and earnings quality: An examination of accelerated filings

“…For example, Braun (2000) concludes that time pressure's earliest effects are manifested through the filtering out of cues related to the qualitative aspects of misstatements. Also, Bennett, Hatfield, and Stefaniak (2014) show that auditors' prenegotiation judgments are more concessionary in the presence of deadline pressure. Specifically, auditors react to end-ofengagement deadline pressure by conceding more on their initial negotiation positions.…”

The Role of Auditor Narcissism in Auditor‐Client Negotiations: Evidence from China

“…Auditors often negotiate with clients to address audit differences, and these negotiations have a material effect on publicly released financial statements (Gibbins et al ; McCracken et al ). Prior research on factors affecting auditor‐client negotiations largely focuses on auditors' negotiating strategies (Tan and Trotman ; Sun et al ; Perreault et al ) and contextual features including engagement risks (Brown and Johnstone ), mandatory auditor rotation (Wang and Tuttle ), deadline pressures (Bennett et al ), and communication mode (Saiewitz and Kida ). Other research examines how negotiation outcome is influenced by auditors' personal characteristics such as professional skepticism (Brown‐Liburd et al ).…”

“…We use this time limit to mimic the deadline pressure inherent in the audit process (DeZoort and Lord ). Research finds that the deadline pressure has significant impacts on the behavior of auditors and clients (Bennett et al ; Lambert et al ). In our experiment, if the negotiation ends in an impasse, the auditor and client earn nothing for the period.…”

When Is the Averaging Effect Present in Auditor Judgments?

“…The response rate is not unusual for mail‐in studies that involve experienced audit professionals (e.g., Thorne et al ). Other mail‐in studies using experienced participants have obtained similar rates: For example, Bennett et al () obtain a response rate of 5.6 percent with auditors and CFOs.…”