The Effect of Past Client Relationship and Strength of the Audit Committee on Auditor Negotiations

Helen L. Brown-Liburd
Rutgers University, Newark – Rutgers Business School – Department of Accounting and Information Systems

Arnold Wright
Northeastern University – Accounting Group

May 10, 2011

Auditing: A Journal of Practice & Theory, Forthcoming

Abstract:

Auditors and clients are often required to resolve difficult, complex accounting issues in which they have different views. Despite its importance we have little knowledge of the effect of contextual factors on auditors’ negotiation behaviors. This experimental study involving 63 experienced audit managers and partners examines the impact of the strength of the audit committee (strong or weak) and past relationship with the client (contending or compromising) on auditors’ judgments in the pre-negotiation planning phase in resolving a difficult, subjective inventory writedown issue. These two important contextual factors are posited to affect auditors’ perceived bargaining power and expectations of difficulties with respect to the impending negotiation. Specifically, we hypothesize an interaction where the most contending position (negotiation strategy) is adopted when the audit committee is strong (enhanced auditor bargaining power) and the past relationship is contending (a difficult negotiation). The findings support these expectations. In additional analyses, we obtain parallel results in the negotiation phase. In all, the findings confirm the importance of strength of the audit committee and past client relationship on auditors’ negotiation planning judgments and the concurrent consideration of these two pervasive contextual factors in the audit environment.

The Effect of Past Client Relationship and Strength of the Audit Committee on Auditor Negotiations

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