The Influence of Perspective Taking Encouraged by the Audit Committee on Auditor and Client Judgments during Accounting Disputes
Auditing: A Journal of Practice & Theory, Forthcoming
Posted: 8 May 2014 Last revised: 17 Apr 2020
Date Written: April 16, 2020
While recent and proposed regulations emphasize the importance of audit committees (ACs) in facilitating auditor-client communication, particularly during financial reporting disagreements, little research has examined this dynamic three-party process. We examine the influence of an AC that encourages auditors (partners and managers) and clients (CFOs and controllers) to re- examine an accounting dispute from the other party’s perspective. Experiment 1 results suggest this approach leads to a higher likelihood of agreement and greater concessionary behavior between parties than an AC that does not encourage perspective taking. Perspective taking also impacts the negotiators in different ways. Auditors’ solution sets (concessions less reservation price) shift closer to the client’s desired adjustment, while the clients’ solution sets get wider suggesting greater flexibility. Further, when the AC subsequently provides the same resolution recommendation to all negotiators, the AC’s initial approach carries over and impacts auditors’ and clients’ subsequent behavior. We find further support for these findings in Experiment 2, which was designed to rule out a potential confound and to use a different perspective taking manipulation. This paper extends negotiation research and should be of interest to practitioners, regulators, and those charged with governance by providing insight on the role of ACs during dispute resolution.
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