Negotiated Reporting and Auditor Size

49 Pages Posted: 23 Nov 2020

See all articles by Claudio A. Bonilla

Claudio A. Bonilla

University of Chile - Faculties of Economics and Business

Harold Lopez

University of Chile

Reed Smith

Kelley School of Business

Samuel L. Tiras

Indiana University - Kelley School of Business

Date Written: September 8, 2020

Abstract

The extant literature views audited financial reports resulting from client-management proposing a report and an auditor issuing an opinion on the report. But the literature finds that this process is a negotiation that is an iterative process between the auditor and client-management. This auditor-client-management (ACM) literature relies on the early research of Antle and Nalebuff (1991) and Zhang (1999) for theoretical guidance, but both studies assume negotiation is a take-it-or-leave-it offer, and not an iterative process. Given the misalignment between the ACM literature and theoretical guidance, we address the ACM relationship by constructing a model that reflects the iterative negotiation process and addresses the role of auditor size in the cost of the audit and the accuracy of the audited report. Our results on auditor size differ, however, when negotiation is modeled as a take-it-or-leave-it offer, thus highlighting the need for theoretical guidance that aligns with the ACM literature’s findings.

Keywords: Audit Reports, Negotiation

JEL Classification: M42, C78

Suggested Citation

Bonilla, Claudio A. and Lopez, Harold and Smith, J. Reed and Tiras, Samuel L., Negotiated Reporting and Auditor Size (September 8, 2020). Available at SSRN: https://ssrn.com/abstract=3707330 or http://dx.doi.org/10.2139/ssrn.3707330

Claudio A. Bonilla

University of Chile - Faculties of Economics and Business ( email )

Santiago
Chile

Harold Lopez

University of Chile ( email )

Universidad de Chile
Diagonal Paraguay 257
Santiago
Chile

J. Reed Smith (Contact Author)

Kelley School of Business ( email )

801 W Michigan Street
BS 4002
Indianapolis, IN 46202
United States
317-274-0867 (Phone)
317-274-3312 (Fax)

Samuel L. Tiras

Indiana University - Kelley School of Business ( email )

801 W. Michigan Street
Indianapolis, IN 46202
United States
(317) 274-3420 (Phone)

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