The Effect of Auditors' Use of a Reciprocity-Based Strategy on Auditor-Client Negotiations
Social Science Research Network
Auditors face the challenging tasks of attesting that the financial statements are free from material misstatement while simultaneously fostering a functional working relationship with the client. As the financial statements may be considered, in part, a product of negotiations between the auditor and client management (Antle and Nalebuff 1991), the negotiation strategy employed by the auditor may be useful in effectively fulfilling both tasks. To investigate the effect of auditor strategy on
... ditor strategy on the resolution of proposed audit adjustments in a post Sarbanes-Oxley environment, we examine the client side of the negotiation. We investigate a strategy that draws upon the societal rule of reciprocation we label "full-disclosure," which makes the waiving of inconsequential audit differences transparent. Specifically, with the full-disclosure approach, the auditor brings to the attention of the client all the audit differences (both significant and inconsequential) discovered during the audit and, subsequently, waives the inconsequential items. In contrast, a strategy of "non-disclosure" of inconsequential items (in which the auditor discloses to the client only the significant audit differences which must be booked) renders the client unaware of the waived inconsequential differences. Results indicate that, relative to a nondisclosure approach, participants representing client management (controllers/CFOs) are more willing to post significant income-decreasing adjustments when exposed to a full-disclosure approach in the course of negotiating the final contents of the audited financial statements. Fulldisclosure also results in greater client satisfaction and retention. Consistent with these findings, additional experimentation suggests that auditors also perceive that altering their approach toward greater disclosure of inconsequential audit differences can improve client satisfaction and retention. Data Availability: Data are available upon request.