Managers’ Audit Negotiation Judgments Before an Initial Public Offering

40 Pages Posted: 30 Oct 2013

See all articles by Helen L. Brown-Liburd

Helen L. Brown-Liburd

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

Arnold Wright

Northeastern University - Accounting Group

Valentina L. Zamora

Seattle University - Albers School of Business and Economics

Date Written: October 28, 2013

Abstract

Auditor-client negotiations are a common and critical part of the financial reporting process, yet we know little about contextual factors that influence negotiation judgments from the manager’s perspective. Managers have incentives to act aggressively since outcomes often materially impact financial reports and managerial compensation. However, managers also have incentives to behave less aggressively since unresolved issues may result in audit delay, qualification or auditor resignation, all of which may damage firm and/or managerial reputation. These two opposing incentives are particularly prominent during the initial public offering (IPO) planning period when information asymmetry between managers and outsiders is arguably at its highest, and scrutiny from a variety of IPO monitors begins to heighten. We examine the impact of two pervasive IPO monitoring parties – auditors and audit committees – on the pre-negotiation judgments of 137 experienced CFO/controllers. Prior audit negotiations research suggests that a contentious past relationship with the auditor compels managers to be less aggressive, while a stronger audit committee curbs managerial opportunism. We thus expect that relative to other conditions, managers faced with a contentious past auditor relationship and a stronger audit committee will be least aggressive in an audit negotiation during the IPO planning period. To test our hypothesis, we use a 2 x 2 experimental factorial design with past auditor relationship (contentious or cooperative) and audit committee strength (stronger or weaker) manipulated between-subjects. The results support our expectations. Further, additional analysis indicates that these strong monitoring mechanisms have a sustained impact on managers’ judgments in the IPO offer year.

Keywords: auditor-client negotiation; negotiation relationship; audit committee; initial public

JEL Classification: M41; M42

Suggested Citation

Brown-Liburd, Helen L. and Wright, Arnold and Zamora, Valentina L., Managers’ Audit Negotiation Judgments Before an Initial Public Offering (October 28, 2013). Available at SSRN: https://ssrn.com/abstract=2346141 or http://dx.doi.org/10.2139/ssrn.2346141

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

Arnold Wright

Northeastern University - Accounting Group ( email )

406 Hayden Hall
United States

Valentina L. Zamora

Seattle University - Albers School of Business and Economics ( email )

901 12th Avenue
P.O. Box 222000
Seattle, WA 98122-1090
United States
206-296-5703 (Phone)

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