Effect of Concession‐Timing Strategies in Auditor–Client Negotiations: It Matters Who Is Using Them

Abstract

In this study, we examine how norms about the use of negotiation strategies by different parties in an auditor–client negotiation influence the relative efficacies of these negotiation strategies. We conduct an experiment with experienced auditors/financial managers as participants, who enter into a negotiation on an income‐decreasing audit adjustment with a hypothetical client/auditor who uses a strategy where the same concessions are given either at the start, gradually, or the end of the negotiation. We find that the concession‐end strategy is more effective than the concession‐start strategy when used by auditors; however, the reverse is true when these same strategies are used by financial managers. The concession‐gradual strategy leads to superior outcomes when used by either auditors or clients. We also provide evidence that auditors’ and financial managers’ perceptions of the norms relating to the use of these strategies correspond to what we propose in our theory.

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

“…Furthermore, our findings help reconcile some of the seemingly inconsistent results of prior negotiation studies. For example, Hatfield et al () and Sun et al () find that clients' previous concessions lead to auditors' reciprocal concessions, but Bergner et al () do not find any difference in auditors' concessionary behavior regardless of whether clients made concessions previously. Such inconsistency could be due to the narcissistic characteristics of the participant pools (mainly audit managers and partners) used in these studies: 54 percent of Bergner et al's participants are partners, whereas the percentage is significantly lower in both Hatfield et al's study (39 percent; p = 0.064) and Sun et al's study (10 percent; p < 0.001).…”

“…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 ).…”

Client negotiation strategy spillover to integrated audit judgments

“…audit differences) and negotiation-related perceptions/attitudes (e.g. satisfaction with the outcome and desire to continue the relationship), within the context of the financial statement audit (Sanchez et al , 2007; Hatfield et al , 2008; Tan and Trotman, 2010; Sun et al , 2015). Extant research has not explored how the process of negotiating audit differences influences auditors’ downstream, or ensuing, judgments.…”

“…That is, in an integrated audit, auditors’ discovery of a misstatement (even one that is not material) triggers an ensuing judgment regarding the severity of the ICD to comply with PCAOB auditing standards (PCAOB, 2007, 2009) [1]. Existing auditing and psychology research shows that negotiation strategy can affect judgments and decisions related to the issue under negotiation (Kwon and Weingart, 2004, 2005; Tan and Trotman, 2010; Sun et al , 2015; MacTavish, 2018); the integrated audit presents an ideal setting to examine whether and how the impact of negotiation timing can persist to affect downstream judgments.…”

“…Accounting research provides some evidence of better (in terms of negotiation outcome and satisfaction) auditor–client negotiation after-effects for the party on the receiving end of a gradual versus an immediate concession strategy. For example, Tan and Trotman (2010) show marginally higher levels of satisfaction for clients negotiating against auditors who concede gradually, and Sun et al (2015) show auditors make bigger concessions in response to, a gradual versus an immediate strategy [3].…”