The Effect of Client Characteristics on the Negotiation Tactics of Auditors

35 Pages Posted: 21 Mar 2006 Last revised: 17 Sep 2008

See all articles by Richard C. Hatfield

Richard C. Hatfield

University of Alabama

Christopher P. Agoglia

University of Massachusetts at Amherst

Maria H. Sanchez

Rider University - Department of Accounting

Abstract

Although the financial statements of an organization are considered a product of management, prior research suggests that a company's financial statements may be affected by the negotiation strategy employed by the auditor when resolving audit differences with management. However, little subsequent research has discussed the potential strategies that auditors may employ during the negotiation process. Our study extends the literature by investigating, in a post-Sarbanes-Oxley environment, whether auditors will employ a reciprocity-based strategy for the resolution of audit differences and what client characteristics (client management's negotiating style and client retention risk) will increase the extent to which it is utilized. Such a strategy involves bringing inconsequential items to management and subsequently waiving these items in an effort to encourage management to be more cooperative in the posting of significant income-decreasing adjustments. The results of our study indicate that client management's negotiating style and retention risk have an interactive effect on auditors' use of a reciprocity-based strategy. Specifically, auditors are more likely to utilize a reciprocity-based strategy when management's negotiating style is competitive and client retention risk is high. Interestingly, the end result of the negotiation process is essentially identical (i.e., similar items are posted), regardless of client characteristics or the auditor's utilization of a reciprocity-based strategy. Thus, it appears that use of a reciprocity-based strategy does not affect the quality of the financial statements, but simply facilitates the process of posting significant items.

Keywords: negotiation strategy, audit differences, reciprocity, client retention, financial statement adjustments, auditor-client relations

JEL Classification: M41, M49

Suggested Citation

Hatfield, Richard C. and Agoglia, Christopher P. and Sanchez, Maria H., The Effect of Client Characteristics on the Negotiation Tactics of Auditors. Journal of Accounting Research, December 2008, Available at SSRN: https://ssrn.com/abstract=892465

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)

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)

Maria H. Sanchez

Rider University - Department of Accounting ( email )

2083 Lawrenceville Road
Lawrenceville Township, NJ 08648
United States

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