The Effect of Auditors' Use of a Reciprocity-Based Strategy on Auditor-Client Negotiations

Abstract

Auditors face the challenging tasks of attesting that the financial statements are free from material misstatement while simultaneously fostering a functional working relationship with the client. As the financial statements may be considered, in part, a product of negotiations between the auditor and client management (Antle and Nalebuff 1991), the negotiation strategy employed by the auditor may be useful in effectively fulfilling both tasks. To investigate the effect of auditor strategy on the resolution of proposed audit adjustments in a post Sarbanes-Oxley environment, we conduct experiments that examine both the client and auditor sides of the negotiation. We investigate a strategy of “concession” that draws upon the societal rule of reciprocation, which makes the waiving of inconsequential audit differences transparent. Specifically, with a concession approach, the auditor brings to the attention of the client all the audit differences (both significant and inconsequential) discovered during the audit and, subsequently, waives the inconsequential items. In contrast, a strategy of “no-concession” of inconsequential items (in which the auditor discloses to the client only the significant audit differences that must be booked) renders the client unaware of the waived inconsequential differences. Results from the client experiments indicate that, relative to a no-concession approach, participants representing client management (controllers/CFOs) are more willing to post significant income-decreasing adjustments (both objective and subjective) when exposed to a concession approach in the course of negotiating the final contents of the audited financial statements. A concession approach also results in greater client satisfaction and retention. Consistent with these findings, results from the auditor experiment suggest that auditors also perceive that altering their approach toward greater disclosure of waived inconsequential audit differences can improve client satisfaction and retention.

Fifty-year overview of judgment and decision-making research in accounting

“…Ng and Tan (2003) focus on auditors and obtain the initial recommendations about potential accounting writedowns and the eventual outcomes of negotiations with clients. Sanchez et al (2007) investigate how auditor strategies during negotiations with the client affect the posting of significant audit adjustments, client satisfaction and client retention. Trotman et al (2005) compare the efficacy of three intervention methods that could be used by auditors to improve negotiation outcomes.…”

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

“…Our results cannot be fully explained by the extant negotiation-related theories in the accounting or general negotiation literature. For instance, the reciprocity mechanism has been found to be applicable to both auditors (Sanchez, Agoglia, and Hatfield 2007;Tan and Trotman 2010) and clients (Ng and Tan 2003;Hatfield, Houston, Stefaniak, and Usrey 2010). Our results showing that the use of the Gradual strategy leads to superior outcomes when used by either auditors or clients attest to the generalizability of the reciprocity mechanism across negotiation parties.…”

Concessions Dynamics in Electronic Negotiations: A Cross-Lagged Regression Analysis

“…This early research on reciprocity as a way of inducing concessions from the opponent was later on picked up in the area of negotiations between auditors and clients, where e.g. Sanchez et al (2007) found that initial concessions by the auditor lead to reciprocal concessions by the client.…”