The Effects of Reporting Options and Client Accounting Competence on Auditor-Client Negotiation Amicability

• In Event: 4.01 Behavioral Audit Research

Abstract

With the increasing use of accounting estimates, multiple reporting alternatives often exist for a single account. As such, when addressing audit-related adjustments with clients, auditors must decide whether to discuss all possible reporting alternatives or approach the client with only a single, auditor-preferred reporting alternative. We examine the effects of presenting multiple vs. a single audit adjustment alternative during the auditor-client negotiation on two important outcomes—the client’s desired level of financial reporting aggressiveness and the client’s satisfaction with the auditor. Additionally, we examine the role of client accounting competence on these two outcomes. Albrecht et al. (forthcoming) note relatively more accounting competence can have negative effects; they find executives with relatively more accounting competence, when incentivized, demonstrate aggressive attitudes toward financial reporting. In an experiment with experienced CFOs and controllers, we find a disordinal interactive effect between the number of adjustment options presented to the client and client accounting competence. Specifically, we find managers with relatively more accounting competence prefer more aggressive financial reporting and are less satisfied with the auditor when the auditor approaches the client with multiple audit adjustment alternatives. In contrast, we find that managers with relatively less accounting competence are more satisfied with the auditor when the auditor presents multiple audit adjustment alternatives. Our study extends the client accounting competence literature into the auditor-client negotiation context and adds to both the client satisfaction literature (e.g., Fiolleau et al. 2013) as well as the auditor-client negotiation literature (e.g., Perrault et al. 2017).

Authors

• Sanaz Aghazadeh, Louisiana State University

• Andrew Marshall Collins, University of South Carolina

• Chad Matthew Stefaniak, University of South Carolina