The Influence of Audit Committee Intervention Approach on Auditor and Client Judgments during Accounting Disputes

• In Event: Auditor Judgment and Decision Making

Abstract

While SOX regulations require audit committees to assist in the resolution of any auditor-client disagreements, research has not examined the role of audit committees as a third party during disputes. An audit committee can use a passive dispute resolution approach where it encourages the auditor and client to resolve the disagreement on their own or an audit committee can use an active approach where the committee suggests that both parties adopt a mindset whereby they should work together and consider the other party’s point of view. Drawing on audit negotiation research and the perspective taking mindset literature in psychology, we examine the impact of a strong audit committee using a passive versus an active dispute resolution approach on auditor and client judgments. In an experiment, auditors (partners and managers) offered lower concessions than clients (CFOs and controllers) when dealing with a hypothetical strong audit committee using a passive guidance approach. Alternatively, auditors (partners and managers) offered similar concessions as clients (CFOs and controllers) when dealing with an audit committee using an active guidance approach. We also find that, even when the audit committee subsequently provided a specific resolution recommendation, the approach used by the audit committee carried over and impacted both parties’ subsequent behavior. Thus, different approaches taken by audit committees can differentially influence the judgments and communication rationale of auditors versus clients. This has implications for the length of negotiations and potential failure to reach an agreement.

Authors

• Sudip Bhattacharjee, Virginia Tech University

• Kimberly Moreno, Northeastern University

• Jonathan Pyzoha, Case Western Reserve University