An Examination of Auditor Negotiation Strategies

Abstract

Auditors and clients are often required to resolve difficult, complex accounting issues in which they have different views. This resolution entails a negotiation process where research has shown that the strategies employed have dramatic effects on the process, final agreed upon outcome, and the relationship of the parties involved. Despite its importance we have little knowledge of the negotiation strategies auditors and clients use and the factors that drive the choice of strategies. This experimental study involving 63 experienced audit managers and partners examines the impact of past relationship with the client (contending or cooperative) and the strength of the audit committee (strong or weak) on auditors' pre-negotiation planning judgments and on the use of a strategy during the negotiation process to resolve a difficult, subjective inventory write down issue.

We hypothesize that auditors are more likely to use a demanding negotiation strategy when the audit committee is strong and when client has been contentious. The findings indicate that the likelihood of the auditor adopting a preferred position within the client's negotiation range is lower when the audit committee is strong and the past relationship has been contentious, consistent with our expectations. Also, the auditor's preferred write down is relatively higher along the client's range when the audit committee is strong. In the negotiation phase the results indicate auditors provide smaller concessions and a higher final position when the audit committee is strong and the past relationship has been contentious, again supporting our hypotheses. In all, the findings support the importance of contextual factors on auditors' negotiation planning judgments and strategies.

Keywords: auditor negotiation, negotiation strategy, negotiation relationship, audit committee

JEL Classification: M41