Client Characteristics and the Negotiation Tactics of Auditors: Implications for Financial Reporting |
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| Authors: | RICHARD C. HATFIELD CHRISTOPHER P. AGOGLIA MARIA H. SANCHEZ |
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| Affiliation: | 1. Culverhouse School of Accountancy, The University of Alabama;2. Department of Accounting & Information Systems, Isenberg School of Management, University of Massachusetts;3. Department of Accounting, College of Business Administration, Rider University. We would like to thank Bob Agoglia,? Joe Brazel, Brian Daugherty, Michael Gibbins, Christine Haynes, Rich Houston, Tamara Lambert, Alan Reinstein, Steve Salterio, Ray Ball (editor), an anonymous reviewer, and participants at the 2005 AAA Annual Meeting, the 2006 Auditing Section Midyear Conference, and the 2006 International Symposium on Audit Research, and workshop participants at Boston College, The University of Alabama, the University of Massachusetts, North Carolina State University, and the University of South Carolina. Professor Agoglia thanks Drexel University for financial support. Data are available upon request. |
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| Abstract: | Although the financial statements of an organization are considered a product of management, prior research suggests that a company's financial statements may be affected by the negotiation strategy employed by the auditor when resolving audit differences with management. However, little subsequent research discusses the potential strategies that auditors may employ during the negotiation process. Our study extends the literature by investigating, in a post–Sarbanes‐Oxley environment, whether auditors will employ a reciprocity‐based strategy for the resolution of audit differences and what client characteristics (client management's negotiating style and client retention risk) increase the extent to which it is utilized. Further, we explore the potential effect of a reciprocity‐based strategy on the quality of the financial statements. Such a strategy involves bringing inconsequential items to management and subsequently waiving these items in an effort to encourage management to be more cooperative in the posting of significant income‐decreasing adjustments. The results of experiment 1 indicate that client management's negotiating style and retention risk have an interactive effect on auditors' use of a reciprocity‐based strategy. Specifically, auditors are more likely to utilize a reciprocity‐based strategy when management's negotiating style is competitive and client retention risk is high. Experiment 2 findings suggest that the auditor's use of reciprocity during negotiation can actually result in more conservative financial statements by helping the auditor manage perceived client pressures to waive or reduce proposed adjustments. |
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