Kevan L. Jensen
University of Oklahoma – John T. Steed School of Accounting
Virginia Polytechnic Institute and State University
December 5, 2011
We examine whether audit-clients’ experience level affects their reactions when auditors use different negotiation tactics to help resolve a material audit issue. Using business owners as experienced clients and accounting students as naïve clients, we find that experienced clients react significantly when auditors compromise on an issue (i.e., split the difference), but naïve clients do not. These results are driven by large negative reactions by experienced clients when auditors do NOT compromise .We attribute this effect to differences in expectations regarding negotiation outcomes. Experienced clients expect auditors to compromise, and are disappointed when they don’t. Since naïve clients have no expectations, they don’t react significantly either way. We also find that both experienced and naïve clients react positively when auditors use immaterial items to create integrative solutions (i.e., cost cutting, non-specific compensation) in resolving a material audit issue, but only when NOT used simultaneously with compromise. We interpret this as indicating that client reactions to integrative tactics are not related to expectations, but are instead likely to be interpreted as signals of auditor empathy or concern for the client’s position. Compromise appears to interfere with these signals.