The Effect of Auditors' Use of a Reciprocity-Based Strategy on Auditor-Client Negotiations

Posted: 16 Mar 2008

See all articles by Maria H. Sanchez

Maria H. Sanchez

Rider University - Department of Accounting

Christopher P. Agoglia

University of Massachusetts at Amherst

Richard C. Hatfield

University of Alabama

Abstract

Auditors face the challenging tasks of attesting that the financial statements are free from material misstatement while simultaneously fostering a functional working relationship with the client. As the financial statements may be considered, in part, a product of negotiations between the auditor and client management (Antle and Nalebuff 1991), the negotiation strategy employed by the auditor may be useful in effectively fulfilling both tasks. To investigate the effect of auditor strategy on the resolution of proposed audit adjustments in a post Sarbanes-Oxley environment, we conduct experiments that examine both the client and auditor sides of the negotiation. We investigate a strategy of concession that draws upon the societal rule of reciprocation, which makes the waiving of inconsequential audit differences transparent. Specifically, with a concession approach, the auditor brings to the attention of the client all the audit differences (both significant and inconsequential) discovered during the audit and, subsequently, waives the inconsequential items. In contrast, a strategy of no-concession of inconsequential items (in which the auditor discloses to the client only the significant audit differences which must be booked) renders the client unaware of the waived inconsequential differences. Results from the client experiments indicate that, relative to a no-concession approach, participants representing client management (controllers/CFOs) are more willing to post significant income-decreasing adjustments (both objective and subjective) when exposed to a concession approach in the course of negotiating the final contents of the audited financial statements. A concession approach also results in greater client satisfaction and retention. Consistent with these findings, results from the auditor experiment suggest that auditors also perceive that altering their approach toward greater disclosure of waived inconsequential audit differences can improve client satisfaction and retention.

Keywords: audit adjustment, negotiation, client satisfaction, reciprocity

JEL Classification: M49, M41, C91, G38

Suggested Citation

Sanchez, Maria H. and Agoglia, Christopher P. and Hatfield, Richard C., The Effect of Auditors' Use of a Reciprocity-Based Strategy on Auditor-Client Negotiations. Accounting Review, Vol. 82, No. 1, 2007, Available at SSRN: https://ssrn.com/abstract=1104684

Maria H. Sanchez

Rider University - Department of Accounting ( email )

2083 Lawrenceville Road
Lawrenceville Township, NJ 08648
United States

Christopher P. Agoglia

University of Massachusetts at Amherst ( email )

Department of Accounting & Information Systems
121 Presidents Drive
Amherst, MA 01003-4910
United States
413 545-5582 (Phone)
413 545-3858 (Fax)

Richard C. Hatfield (Contact Author)

University of Alabama ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States
205 348-2901 (Phone)

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