Interactive Auditor-Client Negotiations: Investigating the Roles of Blame and Conservatism

• In Event: Audit Estimates and Adjustments

Abstract

In this study we consider how social interactions that occur during negotiations between auditors and their clients can impair compliance with regulatory guidance regarding the posting of material misstatements. Specifically, we consider how the direction and accumulating nature of misstatements influence agreed upon adjustments to the financial statements. To test the effect of these characteristics, we construct experimental dyads consisting of audit partners and financial officers, allowing them to interact via a web-based instrument, to reach a mutually agreed upon audit adjustment. As predicted, these misstatement characteristics alter the positions of the negotiators and negotiated outcomes. Specifically, auditors impound a sense of blame when negotiating accumulated audit differences, given their role in passing on adjustments in the past, leading to smaller agreed-upon adjustments. Further, dyads determine smaller adjustments when considering an income increasing, versus decreasing, difference due to financial officers’ perception of auditors’ lack of concern over income increasing adjustments. Additionally, we describe the content of the communications between auditor and client management participants to demonstrate how these parties strategically use the manipulated differences in the negotiation context in efforts to persuade the other party. Finally, we provide evidence that this interactive setting provides different inferences than would be obtained from a traditional, non-interacting, experimental setting.

Authors

• Richard Hatfield, University of Alabama-Tuscaloosa

• Curtis Mullis, Georgia State University

• Ken T Trotman, UNSW Sydney