AUDITOR-CLIENT NEGOTIATIONS OVER ACCOUNTING ISSUES - FIELD EVIDENCE

Abstract

This study investigates the relationship of each of four variables to the auditor’s combined use of the contending and the conceding strategy in auditor-client negotiations over accounting issues. These variables are the precision of accounting regulation, the audit partner’s general level of experience, the client’s accounting expertise, and the auditor-client relationship. Based on a survey of 79 auditor-client negotiations conducted in one of the big-four audit firms, I find that as hypothesized the precision of accounting regulation is positively related to the auditor’s choice of negotiation strategy (i.e. the more precisely regulated the accounting issue is, the more contending is the auditor’s overall negotiation strategy) and that the client’s accounting expertise and the quality of the auditor-client relationship are negatively related to the auditor’s combined use of the contending and the conceding negotiation strategy (i.e. the higher the client’s accounting expertise, the less contending is the auditor’s overall negotiation strategy and the more positive the auditor-client relationship, the less contending is the auditor’s overall negotiation strategy). The partner’s experience is found to be positively related to the auditor’s combined use of the contending and the conceding negotiation strategy (i.e. the more experience the partner has, the more contending is the auditor’s overall negotiation strategy). Further findings indicate that the precision of accounting regulation is by far the most important independent variable. The study also investigates the importance of the variables—the precision of accounting regulation, the audit partner’s general level of experience, the client’s accounting expertise, the auditor-client relationship and the auditor’s combined use of the contending and the conceding negotiation strategy—in predicting accounting outcomes of auditor-client negotiations over accounting issues. I find that the most important variable in predicting the accounting outcome is the precision of accounting regulation, but the auditor’s choice of negotiation strategy and the audit partner’s general level of experience also seem to have effects, as does audit risk as a control variable.