The Effect of Client Characteristics on the Negotiation Tactics of Auditors

Download or read book The Effect of Client Characteristics on the Negotiation Tactics of Auditors written by Richard C. Hatfield and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 has discussed 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) will increase the extent to which it is utilized. 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 our study 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. Interestingly, the end result of the negotiation process is essentially identical (i.e., similar items are posted), regardless of client characteristics or the auditor's utilization of a reciprocity-based strategy. Thus, it appears that use of a reciprocity-based strategy does not affect the quality of the financial statements, but simply facilitates the process of posting significant items.