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Effects of Earnings Forecasts and Heightened Professional Skepticism on the Outcomes of Client-Auditor Negotiation


Helen L. Brown-Liburd


Rutgers University, Newark - Rutgers Business School - Department of Accounting and Information Systems

Jeffrey R. Cohen


Boston College - Department of Accounting

Greg Trompeter


University of Central Florida

August 22, 2012

Journal of Business Ethics, Forthcoming

Abstract:     
Ethics has been identified as an important factor that can affect auditors’ professional skepticism For example, prior research finds that auditors who are more concerned with professional ethics exhibit greater professional skepticism. Further, the literature suggests that professional skepticism may lead the auditor to more vigilantly resist the client’s position in financial reporting disputes. These reporting disputes are generally resolved through negotiations between the auditor and client to arrive at the final reported amounts. To date, the role that professional skepticism potentially plays in the negotiation process has been relatively unexplored. The literature prior to the enactment of Sarbanes-Oxley (SOX) suggests that auditors are more likely to approve a client position when the matter in dispute is relatively ambiguous and when changing the client’s position will result in the client failing to meet analysts’ expectations. However, changes resulting from SOX have led auditors to be more vigilant and therefore results found in the pre-SOX environment may not hold in the current environment where auditors are held more accountable for their actions. Results from an experiment with experienced audit managers and partners suggest that in the post-SOX climate, auditors’ negotiations do not appear to be substantively influenced by management being able to meet or beat forecasts. Moreover, we find that when auditors exhibit heightened professional skepticism, they are more ethical by being conservative and they stand more resolute than when auditors do not exhibit heightened professional skepticism. Finally, although we do not find a main effect for the influence of earnings forecast we do find a significant interaction between earnings forecast and heightened professional skepticism. Implications for practice and research are then presented.

Number of Pages in PDF File: 40

Keywords: Professional skepticism, Negotiation, Earnings management, Audit ethics, Audit judgment

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Date posted: December 12, 2009 ; Last revised: August 23, 2012

Suggested Citation

Brown-Liburd, Helen L. and Cohen, Jeffrey R. and Trompeter, Greg, Effects of Earnings Forecasts and Heightened Professional Skepticism on the Outcomes of Client-Auditor Negotiation (August 22, 2012). Journal of Business Ethics, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1521551 or http://dx.doi.org/10.2139/ssrn.1521551

Contact Information

Helen L. Brown-Liburd (Contact Author)
Rutgers University, Newark - Rutgers Business School - Department of Accounting and Information Systems ( email )
180 University Avenue
Newark, NJ 07102
United States
HOME PAGE: http://raw.rutgers.edu/helenbrownliburd
Jeffrey R. Cohen
Boston College - Department of Accounting ( email )
Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3165 (Phone)
617-552-2097 (Fax)
Gregory Trompeter
University of Central Florida ( email )
PO Box 161400
Orlando, FL 32816
United States
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