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.