The Effect of Magnitude of Audit Difference and Prior Client Concessions on Negotiations of Proposed Adjustments

Abstract

This study reports the result of an experiment examining two aspects of the audit context that auditors likely do not suspect can influence audited account balances: the magnitude of an audit difference and the presence of a prior client concession. Negotiation theory shows that negotiators’ initial positions (e.g., clients’ unaudited balances) as well as feelings of reciprocity created by prior negotiations serve to create expectations for the current negotiation and, in turn, affect the outcomes of such negotiations. Our results show that the magnitude of an audit difference involving an estimate (i.e., difference between client’s account balance and the auditor’s independent estimate) as well as the presence of a prior client concession influence auditors’ negotiation expectations. Specifically, auditors proposed smaller adjustments when the magnitude of the audit difference was high and when the client conceded on an audit issue prior to resolving the difference in estimates. These manipulations similarly influence the negotiated outcome, and this influence is fully mediated by the auditor’s initial negotiation position.

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

“…This is consistent with Hatfield et al. 's () finding that 76 percent of the auditors in their sample never deviated from their initial offer during negotiations with a computer‐simulated client. However, regardless of this belief, research indicates that auditors' pre‐negotiation positions, which likely affect the negotiated outcome, are affected by contextual features of the audit adjustment in predictable ways (e.g., size/order of adjustments, authoritative guidance, deadline pressure, etc.).…”

“…Hatfield et al. () also indicate that only 28 percent of partners receive any formal negotiation training. While anecdotal evidence suggests that this type of training is on the rise, it is often general in nature and often related to audit fees.…”

“…To be clear, the concessionary judgments we measure are not concessions within a negotiation, but rather “pre‐negotiation” concessionary behavior; this provides a strong indication of an ultimate negotiation outcome (e.g., Hatfield et al. ).…”

“…Audit research finds that auditors employ a rigid negotiation strategy by deciding on the financial number that they feel is “correct” and then moving very little from this number during negotiations (e.g., Ng and Tan ; Hatfield et al. ). Further, as stated previously, the differing impact of not reaching an agreement indicates that the balance of power leans toward the auditor.…”

The effect of alternative fraud model use on auditors’ fraud risk judgments

“…The CEO also has disputed proposed audit adjustments and challenged a 6 Clearly, we expect fraud risk assessments to be higher when CEO risk is higher (a main effect for CEO risk), but we do not pose this as a formal hypothesis. 7 Similar to Cohen et al (2011) and Hatfield et al (2010), we cannot determine the specific number of requests sent or the response rate for the study because data collection was facilitated by contacts within the accounting firms. 8 The transition from online to paper instrument resulted in some formatting differences.…”