The Effect of Past Client Relationship and Strength of the Audit Committee on Auditor Negotiations

Abstract

Auditors and clients are often required to resolve difficult, complex accounting issues in which they have different views. Despite its importance we have little knowledge of the effect of contextual factors on auditors’ negotiation behaviors. This experimental study involving 63 experienced audit managers and partners examines the impact of the strength of the audit committee (strong or weak) and past relationship with the client (contending or compromising) on auditors’ judgments in the pre-negotiation planning phase in resolving a difficult, subjective inventory writedown issue. These two important contextual factors are posited to affect auditors’ perceived bargaining power and expectations of difficulties with respect to the impending negotiation. Specifically, we hypothesize an interaction where the most contending position (negotiation strategy) is adopted when the audit committee is strong (enhanced auditor bargaining power) and the past relationship is contending (a difficult negotiation). The findings support these expectations. In additional analyses, we obtain parallel results in the negotiation phase. In all, the findings confirm the importance of strength of the audit committee and past client relationship on auditors’ negotiation planning judgments and the concurrent consideration of these two pervasive contextual factors in the audit environment.

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