Resolving Disputed Financial Reporting Issues: Effects of Auditor Experience and Engagement Risk on Negotiation Process and Outcome

Abstract

Using an experimental task that involves a dyadic negotiation between a computer-simulated client and 60 experienced audit managers and partners, this paper examines the effects of engagement risk and auditor experience resolving complex financial reporting issues on the process and outcome of client-auditor negotiation. The results show that the level of engagement risk affects the negotiation process for auditors with less negotiation experience, revealing that these auditors use a more concessionary negotiation strategy and alter their bidding position more often when engagement risk is high. In contrast, auditors with more negotiation experience use a more contending strategy and do not alter their bidding position regardless of the level of engagement risk. The results also show that auditor experience affects the negotiation outcome, with auditors having more negotiation experience negotiating more conservative final bids and being more confident that those bids are acceptable under GAAP than auditors with less experience.

Keywords: Auditor decision-making, Experience, Negotiation, Risk

JEL Classification: M41, M49, D74, D81