The effect of client characteristics on the negotiation tactics of auditors

Although the financial statements of an organization are considered a product ofmanagement, prior research suggests that a company’s financial statements may be affected bythe negotiation strategy employed by the auditor when resolving audit differences withmanagement. However, little subsequent research has discussed the potential strategies thatauditors may employ during the negotiation process. Our study extends the literature byinvestigating, in a post-Sarbanes-Oxley environment, whether auditors will employ a reciprocitybasedstrategy for the resolution of audit differences and what client characteristics (clientmanagement’s negotiating style and client retention risk) will increase the extent to which it isutilized. Such a strategy involves bringing inconsequential items to management andsubsequently waiving these items in an effort to encourage management to be more cooperativein the posting of significant income-decreasing adjustments. The results of our study indicate thatclient management’s negotiating style and retention risk have an interactive effect on auditors’use of a reciprocity-based strategy. Specifically, auditors are more likely to utilize a reciprocitybasedstrategy when management’s negotiating style is competitive and client retention risk ishigh. Interestingly, the end result of the negotiation process is essentially identical (i.e., similaritems are posted), regardless of client characteristics or the auditor’s utilization of a reciprocitybasedstrategy. Thus, it appears that use of a reciprocity-based strategy does not affect the qualityof the financial statements, but simply facilitates the process of posting significant items.