The Auditor-Client Management Relationship in Financial Reporting Negotiation: Focusing on the Dyad

This paper contributes to the growing literature on the auditor-client management negotiation process by focusing on the dyadic relationship. Our audit partner-CFO dyads describe the process of resolving issues related to financial reporting using a combination of open ended and semi-structured questions. Our qualitative and quantitative analysis of the interviews suggests that relationships can be characterized as either proactive or reactive and nested within these relationships some are described as good and some as poor. From our analysis, it appears that the CFO determines implicitly, and sometimes explicitly, the type of relationship they want with their auditor (i.e. proactive or reactive). However, it also appears that the audit partner is responsible for relationship quality (i.e. good or poor). But if the relationship is not in a good state or there is a mismatch between the CFO and audit partner personalities, the audit partner will most likely be switched either by the audit firm or the CFO. Further, our informants described a negotiation process that is not linear, but rather one that can iterate backwards, skip forward and return to redefine the basic issue. We label this aspect of negotiation as fluidity. Finally, two major types of issues were discussed (i.e. regulatory type issues or transaction-based issues) with the type of issue influencing many aspects of the resolution process. Overall, this qualitative research substantially increases our understanding of the nature of the CFO-audit partner dyadic relationship and improves our understanding of the components of prior models of auditor-client management negotiation.