Auditor Negotiation Research Articles

Negotiating with the tax auditor: Determinants of tax auditors' negotiation strategy choice and the effect on firms’ tax adjustments

Using a survey of tax auditors, we investigate which factors determine tax auditors' choice of negotiation strategies during tax audits and analyze the effect of their chosen strategy on audit outcomes. The results show that, compared to a cooperative auditor negotiation strategy, a competitive auditor negotiation strategy is associated with significantly higher additional assessed taxes. However, the competitive strategy is associated with a lower probability that the negotiation partners will reach an agreement. These findings indicate an advantage of combining competitive and cooperative tactics (i.e., using a “mixed strategy”). We find that although this mixed strategy does not lead to significantly fewer additional taxes, it results in a higher agreement probability. Moreover, we show that the probability of using a mixed strategy increases with audit expertise and time pressure, whereas the use of a competitive (cooperative) strategy increases with the availability of higher authority (the quality of the taxpayer's financial accounting system) and a perceived competitive (cooperative or mixed) negotiation strategy of the tax advisor. In sum, our study provides new insights into how firms' tax burden is affected by negotiations between tax auditors and firms' tax advisors. The way these negotiations affect firms' tax burden is relevant for both tax policy and firms.

The effect of gender and firm identification on auditor pre-negotiation judgments

This paper extends current auditor negotiation research by considering the effects of two dimensions of auditors' identity that are posited to be relevant to auditors' negotiation: gender and audit firm identification. Women earn over half of college degrees in accounting, and hold more than half of accounting and auditing positions in the US, yet the balance of the gender of partners at audit firms is currently not equal (AICPA, 2017). However, as more women advance into partnership positions in firms, it is increasingly important to have an understanding of how gender affects the behaviors, processes and outcomes of negotiation, and thus the quality of financial statements. The auditor-client negotiation context has features, such as ambiguity and representation of others that can “trigger” the salience of auditors' gender and firm identity. Once salient, these two dimensions of auditors' identity shape auditors' motivational orientation towards negotiations, which, in turn, affects the auditors' negotiation behavior and negotiation outcomes.The study finds that male and female auditors approach the negotiation over audit adjustments differently. Although many negotiation studies find that males negotiate more aggressively than do females, auditor-client negotiation offers a unique setting that has been found to reverse this common trend. We hypothesize and find that female auditors recommend higher audit adjustments than males. However, the level of firm identification moderates female's recommended audit adjustments such that at higher levels of firm identification, the larger audit adjustments recommended by females decrease. This finding is consistent with the growing research on gender differences in auditing and the research on gender and risk tolerance, which find females to be more risk averse, but contrary to much of the negotiation research which shows males as more aggressive and achieving higher negotiated outcomes. In supplemental analysis, we find that our results hold in the senior manager subsample but not in the partner subsample. This result is consistent with theory on gender differences which suggests that the differences will disappear with increased occupational socialization (Smith & Rogers, 2000). Practical implications are discussed.

Auditor objectivity as a function of auditor negotiation self-efficacy beliefs

This study empirically examines whether an auditor's perceived ability to negotiate discretionary accounting issues with clients (auditor negotiation self-efficacy) is related to auditor objectivity, and whether an auditor's negotiation self-efficacy has a greater impact on her objectivity when the auditor's accuracy motive (professional identity) is strong rather than weak. We tested the hypotheses using a cross-sectional survey design and obtained 146 responses from among 800 surveyed experienced Swedish auditors. The findings indicate that auditors with higher negotiation self-efficacy were more likely to make decisions on a material and discretionary accounting issue contrary to their clients' desires compared to auditors with lower self-efficacy. The relationship between negotiation self-efficacy and auditor objectivity was not moderated by professional-identity strength. These research findings suggest that recruiting and training auditors to increase their negotiation self-efficacy may be an effective method to enhance auditor objectivity without the problems inherent in other methods, such as auditor rotation. Our sample was obtained in Sweden, which allows long auditor tenures. We caution that, although our analysis controlled for auditor tenure, the effect of auditor negotiation self-efficacy may not be generalizable to countries that limit tenure through regulation.

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

Ethics has been identified as an important factor that potentially affects 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.

Effect of Auditor Negotiation Experience and Client Negotiating Style on Auditors' Judgments in an Auditor-Client Negotiation Context

SUMMARY In this paper, we present the results of an experiment that investigates the effects of two factors—auditors' negotiation experience and client negotiation style—on auditors' perceived ultimate negotiation outcome in terms of an asset impairment writedown. We show that negotiation experience leads to a higher perceived ultimate negotiated writedown for a client with a contentious negotiation style, suggesting that negotiation experience reaps benefits when it is needed most (i.e., when the client is difficult to deal with). Negotiation experience has no effect for a client with a collaborative negotiation style. We also find that the effect of client negotiation style on auditors' perceived negotiation outcome is contingent on the auditors' negotiation experience. Inexperienced auditors perceive a lower ultimate negotiated writedown when dealing with a contentious rather than a collaborative negotiation style client. In contrast, experienced auditors' perceived negotiation writedown is not affected by the client negotiation style. Data Availability: Contact the authors.

Resolving Disputed Financial Reporting Issues: Effects of Auditor Negotiation Experience and Engagement Risk on Negotiation Process and Outcome

SUMMARY: In an experiment involving a dyadic negotiation between a computer-simulated client and practicing auditors, we examine the effects of engagement risk and auditor negotiation experience on the process and outcomes of client-auditor negotiations. We find that auditors with lower negotiation experience who encounter a high risk client use a more concessionary negotiation strategy, achieve a negotiated outcome that is more aggressive (consistent with the client's aggressive preference), and are less confident that the outcome they negotiate is acceptable under GAAP compared with the negotiation process and outcome results of auditors with higher negotiation experience. In contrast, auditors with higher negotiation experience use a less concessionary strategy, achieve an outcome that is more conservative regardless of risk context, and are more confident that the outcome they negotiate is acceptable under GAAP. This study illustrates the important roles that engagement risk, task-specific negotiation experience, and pressure from the client regarding an aggressive financial reporting preference play in the process and outcomes of client-auditor negotiation.

Understanding Auditor Negotiations Through the Lens of Social Identity: The Effects of Gender and Firm Identification

This paper extends current auditor negotiation research by considering the effects of two dimensions of auditors' identity that are relevant to auditors' negotiation - gender and audit firm identification. The theoretical model proposes that auditor-client negotiation context has features that trigger the salience of auditors' gender and firm identity. Once salient, these two dimensions of auditors' identity shape auditors' motivational orientation towards negotiations, which, in turn, affects the auditors' negotiation behavior. The study finds that auditors approach audit adjustment and note disclosure decisions with different motivational orientations. In particular, the degree of firm identification differentiates women's and men's proposed audit adjustment and the level of experience effects auditors' note disclosure decisions. However, the direction of the interaction and the relationship between experience and note disclosure were unexpected. Therefore, further research is needed to explore why these findings are in contradiction of findings in past general negotiation and auditor negotiation research.

An Examination of Auditor Negotiation Strategies

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.

The Auditor's Negotiation Strategy Selection: Nature of the Auditor-Client Management Relationship and Flexibility of Initial Accounting Position

The auditor's initial negotiation strategy and tactics choice determines how the upcoming negotiation is approached, carried out and potentially the eventual outcome. We experimentally examine two factors key to the auditor's initial formulation of his/her negotiation strategy: the nature of the auditor-client management relationship and the auditor's initial assessment of client management's flexibility in its accounting position. We posit that these two factors will condition the auditor's approach to the upcoming negotiation based on the negotiation literature. Our experimental results, obtained from 140 audit partners, indicate that initial client management accounting position inflexibility leads to auditors being more likely to use contending tactics and to be much firmer in their commitment to achieve the negotiation goal of a substantial reduction in income. Experimentally, we found only limited marginally significant effects for nature of the relationship. We also carried out hypotheses tests employing a structural equations model which allows for greater latitude in individual interpretation of the features manipulated. This model confirmed our main experimental results in addition to revealing subtleties that our experiment did not document. In particular, the more positive and cordial the auditor client relationship, the less committed the auditor is to the negotiation goal of a substantial reduction in income and the greater the likelihood the auditor will employ concessionary or compromising tactics. Also, we find the first evidence documented in the accounting negotiation research that auditors consider an integrative strategy, expanding the agenda of issues, when faced with an inflexible initial client accounting position. Our results have mixed implications for auditors. The experimental results show the auditors reacting appropriately to an inflexible client management initial accounting position, although not considering as wide a range of strategies as they might. Furthermore, the marginally significant experimental results for effects of client relationship nature on auditor judgments seem to be appropriate as relationship quality should not affect audit evidence evaluation and accounting policy judgment. However, the structural equations model's more fine-grained results indicate auditors respond to the nature of the relationship. The model shows that a more positive and cordial relationship leads auditors to select concessionary and compromising tactics along with a lower commitment to the negotiation goal of a substantial reduction in client net income, leading to the potential for more aggressive (income increasing) accounting being reported in financial statements.

Auditor Negotiations: An Examination of the Efficacy of Intervention Methods

Negotiations are a pervasive feature of the audit process (e.g., the resolution of proposed audit adjustments and disclosures). The results of such negotiations are of great importance to the capital markets, the client, and the auditor. The purpose of this study is to examine the effectiveness of three promising, pragmatic intervention methods for enhancing auditor negotiation performance: a role-playing intervention—assuming the client's position in a mock negotiation; a passive intervention—explicitly considering the client's interests and options; and a practice intervention—engaging in a mock negotiation prior to the client negotiation. We posit that the role-playing intervention will improve negotiation results, because this approach requires direct experience in considering and arguing the client's position and more cognitive effort in obtaining an understanding of the counterpart's position, a critical factor identified in the negotiation literature for successful performance.Forty-five audit managers and partners were provided a realistic case based on an actual scenario involving the potential writedown of inventory due to obsolescence. Participants were randomly assigned to one of three groups (role-playing, passive, or practice) and asked to negotiate the issue with a confederate playing the role of the CFO. Auditor conservatism and a large actual subsequent writedown suggest that a significant adjustment is warranted. The results indicate that the role-playing intervention method led to an enhanced negotiation outcome (greater writedown) compared to the passive and practice groups. Process improvements on a number of dimensions were also found, particularly for the role-playing group compared to the practice group.

A Comparison of Auditor and Client Negotiation Decisions

This study examines the negotiation decisions made by professional auditors and clients when facing a revenue recognition conflict. Specifically, we investigate the degree of flexibility inherent in auditor and client negotiation decisions, whether auditors and clients accurately perceive the other negotiating party's positions, and the types of negotiation tactics used by both parties. The results indicate that auditors and clients approach conflict resolution in very different ways. Clients were more flexible (i.e., exhibited a greater difference between their revenue recognition goals and limits), determined the auditor's goals and limits more accurately, and were more likely to use negotiation tactics such as bid high/concede later and trade-off one reporting issue for another. These data are consistent with the view that auditors are hired to provide independent, accurate judgments on financial reporting matters, and may therefore consider their accounting decisions to be less open for negotiation as compared to clients. Implications and directions for future research are discussed.