an examination of auditor negotiation strategies by …
TRANSCRIPT
AN EXAMINATION OF AUDITOR NEGOTIATION STRATEGIES
BY
HELEN L. BROWN
BOSTON COLLEGE
ARNIE WRIGHT
NORTHEASTERN UNIVERSITY
April 2008
Acknowledgements: We gratefully appreciate the comments from the participants at the research workshops of Queen’s University and Bentley College and the following individuals: Mohammad Abdolmohammadi; Jean Bedard; Christine Nolder; Steve Salterio; and Regan Schmidt.
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ABSTRACT
Auditors and clients are often required to resolve difficult, complex accounting issues in which they have different views. This resolution essentially entails a negotiation process where research has shown that the strategies employed have dramatic effects on the process, final agreed upon outcome, and the relationship of the parties involved. Despite its importance we have little knowledge concerning the negotiation strategies auditors and clients use and the factors that drive the choice of strategies. This experimental study involving 63 experienced audit managers and partners examines the impact of past relationship with the client (contending or cooperative) and the strength of the audit committee (strong or weak) on auditor pre-negotiation planning judgments and on the use of a strategy during the negotiation process to resolve a difficult, subjective inventory write down issue. The findings indicate that the likelihood of the auditor adopting a preferred position within the client’s negotiation range is lower when the audit committee is strong and the past relationship has been contentious, consistent with our hypotheses that reflect a more contending position by the auditor under such conditions. Also, the auditor’s preferred write down is relatively higher along the client’s range when the audit committee is weak. In the negotiation phase the results indicate auditors provide smaller concessions and a higher final position when the audit committee is strong and the past relationship has been contentious, again supporting our hypotheses. In all, the findings support the importance of contextual factors on auditors’ negotiation judgments and strategies. Key Words: auditor negotiation; negotiation strategy; negotiation relationship; audit committee
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INTRODUCTION
Given the inherent subjectivity of many accounting methods and difficulties of
measurement (e.g., estimates), it is well recognized that the financial statements are the
result of a negotiation or resolution process between the auditor and management (Leavitt
1998; Wright and Wright 1997; Antle and Nalebuff 1991; and DeAngelo 1981). As a
result, there has been a growing body of research concerning the nature of this process
(e.g., Gibbins et al. 2001; Bame-Aldred and Kida 2007) and potential ways to improve
negotiation outcomes (e.g., Trotman et al. 2005; Sanchez et al. 2007). However, there has
been little consideration of contextual or environmental factors (i.e., nature of the issue,
corporate governance, relationship between the auditor and client, etc.) that may affect
the negotiation strategies that auditors and clients choose to use and the extent to which
each reacts to the other’s strategies. Specifically, in this study we examine the impact of
strength of the audit committee (strong or weak) and past relationship with the client
(contending or cooperative) on auditor choice and use of alternative negotiation
strategies. In an auditing context, a prior contending relationship is when in the past the
client has been insistent on his or her position. In contrast, under a cooperative past
relationship the client may begin with a particular position but then is open and willing to
consider counter-arguments and to compromise or concede when deemed appropriate.
Prior positive interactions with a counterpart in a negotiation can produce higher levels of
cooperation as opposed to prior contentious interactions (Perlman and Oskamp, 1966;
McClintock and McNeel, 1967; Michelini 1971, Slusher 1978; Swingle and Gillis, 1986;
Greenhalgh and Chapman, 1998; and Gibbins et al. 2007).
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The audit committee can play a significant role in overseeing the audit process
and helping to mediate disputes between management and the auditor (Sarbanes Oxley
Act 2002, hereafter referred to as SOX). Therefore, a strong audit committee can be
expected to enhance the relative bargaining power of the auditor vis-à-vis management in
a negotiation.
There is a large body of literature that indicates negotiation strategy has a
profound impact on the process, outcome, and relationship of the parties engaged in
resolving an issue (e.g., Bazerman et al. 2000; and Fisher et al. 1981). Thus, it is
important to understand the strategies auditors and clients employ and the factors that
drive the use of various strategies.
To address these issues we employ an experimental study with 63 experienced
audit managers and partners. In the first phase of the experiment, auditors engage in
negotiation planning in response to a case involving a contentious accounting issue where
they consider a position and acceptable range of alternatives, and then anticipate the
strategy and position (range of alternatives) of their client counterpart. In the second
phase auditors engage in up to five rounds of negotiations with a computerized
counterpart employing a relative contending negotiation strategy. Auditors decide
whether to accept the client’s position at each round or offer an alternative position.
We hypothesize that in the pre-negotiation stage auditors will plan to use a more
contending strategy when the audit committee is strong than when it is weak and when
the past client relationship has been contending rather than cooperative. When the audit
committee is strong it is likely the auditor will assess a stronger relative bargaining power
vis-à-vis the client than with a weak audit committee with the audit committee acting as
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an objective intermediary. When the past relationship has been contending, it is expected
the auditor will exercise conservatism (Smith and Kida 1991) and see the need to be
contending to ensure an appropriate resolution is achieved. The findings confirm these
expectations.
The remainder of this paper is divided into four sections. The next section
provides a review of the relevant literature and develops our research hypotheses. This
section is followed by a description of the method and presentation of the results. The
final section is devoted to a discussion of the major findings and their implications for
practice and future research.
BACKGROUND LITERATURE AND HYPOTHESES DEVELOPMENT
Negotiation
Negotiation is a process by which a joint decision is made by two or more parties
with differing preferences and is one in which the outcome ultimately affects the welfare
of both (Murnighan and Bazerman 1990) and possibly third parties, as is the case in
auditing (e.g., users of the financial statements). In general, the parties first verbalize
contradictory demands and then move toward agreement using a variety of possible
negotiation strategies (Pruitt 1981).
The very nature of the audit function often necessitates negotiation between the
auditor and the client. For example, before an auditor is willing to express an unqualified
opinion on a client’s financial statements, any material disputed accounting issues or
disclosures must be resolved. The resolution of these issues may result in a negotiation
between the auditor and the client, where the client is likely to attempt to persuade the
auditor to accept his position and visa versa.
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An emerging line of research examines auditor-client negotiations over complex
financial reporting issues (e.g., Gibbins et al. 2007, 2005; Trotman et al. 2005; Ng and
Tan 2003; Gibbins et al. 2001).1 Research in auditor-client negotiation builds on the
conceptual model developed by Gibbins et al. (2001) which expands the elements of
negotiation examined in prior negotiation research and depicts the negotiation process as
including the accounting issue, the negotiation process, and the resulting accounting
outcome. The importance of accounting contextual features that may affect negotiations
is also highlighted, which are placed into three general categories: the role of external
conditions and constraints; the interpersonal auditor client context; and the capabilities of
the parties. Based on discussions with audit partners, they find that auditor-client
disagreements are frequently negotiated and the outcome is generally material to the
financial statements.
From this model of auditor-client negotiation Gibbins et al. (2005) conduct a
related study where they examine the congruency of auditor and client recalls of
negotiation experiences. They find that auditor-client recalls are largely congruent with
respect to the types of issues negotiated, parties involved in resolving the issue and the
elements of the negotiation process. The results provide insights into the mental models
employed by auditors and clients during the negotiation process and potential reasons that
auditor-client negotiations do not result in an optimal outcome. For example, the study
reports that both auditors and clients view negotiation as a process of persuading the
other party to accept their position, which generally leads to a distributive (i.e., win-lose)
outcome.
1 See Brown and Wright (2008) for a review of this literature.
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The studies conducted by Gibbins et al. (2005, 2001) provide a model of the
auditor-client negotiation process. We extend this work by examining the impact of two
important contextual factors (strength of the audit committee and past relationship with
management) on the choice and use of negotiation strategies. Negotiations have been
generally characterized as a three stage process (Neale and Bazerman 1991): pre-
negotiation planning; negotiations; and outcomes (e.g., nature of the agreement,
commitment). We focus on the first two phases of negotiation. Further, the auditors and
client management in the Gibbins et al. (2005) study recall contentious issues from past
experiences. In considering the types of negotiation strategies that auditors use it is
difficult to generalize from their findings, since the underlying context (the accounting
issue, client situation, negotiation past experience, etc.) vary considerably across these
experiences and is likely to influence the strategy employed. In our study we control for
context, which allows us to learn about the potential strategies employed in response to
contextual factors and an opponent’s strategy.
Additionally, Bame-Aldred and Kida (2006) find that auditors and clients
approach conflict resolution in very different ways. For example, the client participants
were more flexible, more accurately assessed the auditor’s goals and limits and were
more likely to use negotiation tactics where they made concessions or traded off on
various issues than auditors.
While these studies highlight that auditors and clients view negotiations from an
individualistic perspective, they do not address contextual factors that may influence the
negotiation process. While a limited number of studies begin to address this issue (e.g.,
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Gibbins et al. 2005, Brown and Johnstone 2007, Ng and Tan 2003, Gibbins et al. 2001),
little empirical evidence is available.
In the negotiation literature strategy is generally evaluated in terms of the
integrative component (both parties are better off) or in terms of the distributive
component (one party or both ends up with losing some of what would be ideally
desired). A distributive strategy reflects a view that negotiation is a process of dividing
up a fixed set of resources (Neale and Bazerman 1985; Bazerman 1986). One type of
distributive strategy is a contending strategy, in which one party requires the other party
to make concessions, ultimately resulting in a “win-lose” outcome favoring the
contending party. Complementary to the contending strategy is a concessionary strategy,
in which one party concedes to the other, ultimately resulting in a “lose-win” outcome
that does not favor the concessionary party. A cooperative strategy falls between these
two extremes where the person is willing to consider the other individual’s arguments
and will compromise when deemed appropriate.
In contrast to these distributive strategies, an integrative strategy involves jointly
producing a solution where both parties gain at least some benefit (Rahim 1992), i.e., a
“win-win” outcome. While using an integrative strategy is often viewed as superior,
actually achieving integrative outcomes is relatively infrequent (Neale and Bazerman
1991; Kramer and Pommerenke 1993). The final negotiation strategy is avoidance, in
which the parties make little real attempts to resolve the issue (Bazerman and Lewicki
1983). Avoidance is generally not considered an appropriate strategy in auditing where
deadlines require resolution, e.g., SEC requirements for filing the financial statements
and the audit report.
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Few accounting studies specifically examine strategies used by auditors when
negotiating with clients. McCracken et al. (2008) investigate whether generic negotiation
results can be transferred and applied to an auditor-client negotiation setting. They
examine the effect of differences in experience (i.e., audit partners versus audit
managers) level on the intended negotiation strategy and find that managers and partners
are equally likely to plan to use an integrative strategy that employs joint problem
solving. However, partners are less likely to use the integrative strategy of making
mutually beneficial tradeoffs in order to obtain a desired outcome on more significant
issues. Additionally, with respect to distributive strategies, they find that less
experienced audit managers are more likely to use concessionary or compromising
strategies as compared to more experienced partners. Their results demonstrate that the
findings in the general negotiation literature may not be replicated in an accounting and
auditing context.
Theoretical Background and the Development of the Hypotheses
Audit Committee Effectiveness
Professional standards and regulators direct auditors to discuss the quality of
financial reporting alternatives with the audit committee (AICPA SAS 90 2000; Blue
Ribbon Commission 1992), and the passage of Sarbanes-Oxley (2002) has placed an
even greater emphasis on the role and the responsibilities of the audit committee. The
effect of this greater accountability that audit committees now bear is still not clear as it
relates to auditor-client disagreements over financial reporting alternatives. For example,
prior to the passage of Sarbanes-Oxley (“SOX”), there is evidence that auditors viewed
audit committees as typically ineffectual and lacking adequate power to be a strong
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governance mechanism (Cohen et al. 2002). In a follow-up interview study, however,
Cohen et al. (2007) find that post SOX auditors’ experiences with audit committees have
substantially changed with significant improvement in audit committees’ financial
expertise, diligence, and authority. Nonetheless, auditors report that audit committees
continue to be reluctant to be directly involved in mediating an auditor-client dispute,
preferring rather to be informed of the final resolution.
The extent to which the audit committee factors into auditor-client pre-negotiation
and negotiation behaviors is still an empirical question. Practitioners may perceive that
increased accountability and authority post SOX provide audit committees with greater
influence than they have had in the past when confronted with auditor-client disputes.
However, the impact of the audit committee is expected to depend heavily on the
effectiveness of the committee. Drawing on Institutional Theory (Fogarty and Rogers
2005; Gendron et al. 2004; Orton and Weick 1990; Kalbers and Fogarty 1998, 1993), we
focus on audit committee effectiveness in “form” versus “substance”. In form an audit
committee must meet regulatory requirements. For instance, SOX requires AC members
to be independent and financially literate; further, at least one member must be a financial
expert. However, Institutional Theory argues that an audit committee may appear by
outward signs to be effective (in form) yet actually, in substance, not truly be able to
accomplish its responsibilities. For instance, if the audit committee is not granted
sufficient authority and power from the board to confront management on contentious
accounting issues, then it cannot accomplish its objective of achieving high financial
reporting quality.
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Further, when the issues are not clearly defined by GAAP, there is an increased
level of subjectivity and judgment and clients are likely to try to persuade auditors to
accept their position. Therefore, despite the increased responsibilities of the audit
committee post SOX, auditors and clients still appear to be the primary parties engaged in
negotiation to resolve an ambiguous reporting issue.
A more effective audit committee will provide oversight over the negotiation
process and advocate for proper financial reporting. Ng and Tan (2003) find that
auditors’ perceived negotiation outcome is jointly influenced by the availability of
authoritative guidance and the effectiveness of the audit committee. Specifically, when
accounting standards are clear, auditors indicate they believe an adjustment will be
recorded, even if it causes the client to miss analysts’ forecasts, regardless of whether the
audit committee is strong or not. However, when authoritative guidance is lacking,
auditors perceive that the negotiated outcome will result in the client booking an
adjustment when audit committee effectiveness is high but not when it is ineffective.
Their results suggest that audit committee effectiveness is seen as strengthening the
auditor’s position and potentially mitigates suboptimal financial reporting quality.
However, their study was based on auditors’ perceptions of whether an adjustment would
be recorded. They do not directly examine the impact of the audit committee on the
negotiation process and, in particular, the strategies employed.
Studies that have examined audit committees’ interactions with external auditors
have generally found that audit committees tend to be more supportive of the auditor’s
position than management’s position (e.g., DeZoort and Salterio 2001, Knapp 1987).
DeZoort and Salterio (2001) find that audit committee members who are independent and
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who possess audit knowledge are generally more supportive of auditors in an accounting
conflict than they are of management. Knapp (1987) finds that audit committee members
are more likely to support auditors’ disputes with management when audit committee
members are corporate managers, the issue under dispute has objective technical
standards that support the auditor’s position, and the client’s financial condition is weak
rather than strong.
Given these findings auditors’ pre-negotiation and negotiation behavior is likely
to be influenced by their assessment of audit committee effectiveness. A critical
component in auditors’ selection of a negotiation strategy is relative bargaining power
(Gibbins et al. 2003). Research suggests that individuals with power generally use their
power and as a result have better outcomes that the weaker party (Rubin and Brown
1975, Greenhalgh et al. 1985). If the auditor believes that the strength of the audit
committee will bolster (diminish) their bargaining power, this is likely to lead to greater
insistence (lesser insistence) on a particular position. Thus, we expect that:
H1a: Auditors will plan to use a more contending negotiation strategy when the audit committees is strong than when it is weak.
H1b: Auditors will actually use a more contending negotiation strategy when the
audit committees is strong than when it is weak. Past Negotiation Relationship
Auditor-client negotiations are rarely one time occurrences. Research
demonstrates that expectations about an opponent’s behavior matters. Diekmann et al.
(2003) analyzes the effect of expectations on negotiation behavior and find that
participants achieved significantly lower, less favorable outcomes, made more
concessions and were more likely to predict that an agreement would not be reached
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when they expected their opponent to be very competitive as compared to participants
who anticipated a less competitive opponent.
As a result of prior negotiations, both parties form some type of cognitive
representation of how the other party will behave in a negotiation. A particular course of
action taken by a negotiator may be as much a function of the continuing relationship as
the issue at hand. There are three primary aspects to the continuing relationship: previous
bargaining experience between the parties, the current bargaining interaction, and
anticipated future interactions (McGrath 1966). Therefore, an important determinant of
bargaining behavior is the negotiator’s perception of and attributions regarding their
opponent’s behavior (Gruder 1971). Further, Kahan (1968) find that pre-negotiation
expectations may be a determinant of cooperative-competitive strategies.
It is expected that information is an advantage in negotiations because knowledge
about a counterpart’s motivations reduces uncertainty. Therefore, the negotiator can
adjust his/her behavior to expectations about the other party and enhance the likelihood
of coming closer to his/her goal (Schei and Rognes 2003). Extending this premise to the
auditor-client environment, it is likely that auditors prepare for negotiations and select a
negotiation strategy based on previous negotiations with management. For example, if an
auditor’s previous interactions with a member of management were contending, then the
auditor may expect a difficult negotiation and take a strong, contending stand to avoid
having the manager gain an advantage. Further, a manager’s contending strategy poses
greater risks of a potential misstatement(s). Prior research has shown that auditors tend to
follow a conservatism bias when faced with contentious matters (Smith and Kida 1991).
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Thus, we expect auditors to plan and use a contending strategy in anticipation of dealing
with a difficult, contending manager.
Alternatively, auditors facing a contending manager may start the negotiation by
making a small concession to induce the manager to also make concessions. Sanchez et
al. (2007) find that client management is more willing to post significant income-
decreasing adjustments when auditors disclose that they are willing to waive immaterial
audit differences. However, Ng and Tan (2003) report that auditors indicate a reluctance
to use a strategy of beginning with a high position and then later concede, viewing this as
unprofessional.
Finally, auditors may perceive their interests are not aligned with the manager and
adopt a negotiation strategy that results in a win-lose outcome. Thompson and Hastie
(1990) find that most negotiators expect the other party’s interest to be opposed to their
own and thus seek to only maximize their own outcomes. Thus, under this premise, it is
possible that auditors may disregard past negotiation behavior of the manager and focus
only on persuading him or her to accept their current position. Consistent with this, Schei
and Rognes (2003) find that individualists (concerned with maximizing only their own
outcome) obtain poorer outcomes, even when they are informed about their opponent’s
cooperative orientation.
Given the significant risks of dealing with a contending client manager and the
predominant presence of auditor conservatism (Smith and Kida 1991), we posit that past
negotiation experience with a manager will influence the auditor’s planned and actual
negotiation strategy, as indicated in H2. However, our results also allow us to examine
the alternative possibilities noted.
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H2a: Auditors will be more likely to plan to use a contending negotiation strategy when the past relationship with management was contending rather than cooperative.
H2a: Auditors will be more likely to actually use a contending negotiation strategy
when the past relationship with management was contending rather than cooperative.
It is possible that there may be an interactive effect of audit committee effectiveness
and past relationship. For example, when the client has been contentious in past
negotiations and the audit committee has a history of providing oversight over the
negotiation process and advocating proper financial reporting, auditors may adopt a
highly contending strategy. In this situation where the client has been contentious in the
past, auditors may believe that there is a greater risk of a potential misstatement(s) and
adopt a contending strategy, especially when they believe that they have greater
bargaining power given a strong audit committee. Alternatively, when the audit
committee is not very effective and the client has previously been contentious, auditors
may be less contentious and try to reach some level of compromise since they do not
expect any support from the audit committee. Despite these possibilities, we do not offer
specific hypotheses for interactive effects, since there is insufficient research and theory
at this time to hypothesize the potential effects.
METHOD
Participants
We recruited U.S. audit partners and managers to participate in the study. These
are appropriate participants because they are routinely responsible for negotiating with
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clients. Sixty-three2 auditors with prior client-auditor negotiation experience completed
the experiment. Of note, there are 42 audit managers and 21 partners with an average of
7.88 and 18.14 years of auditing experience respectively. Further, managers and partner
participants have sufficient direct task experience in negotiating disputed accounting
matters with a mean of 10.19 and 15.14 times, respectively, in which they resolved a
contentious matter with clients. Auditors came from three of the Big 4 firms with 25, 23,
and 15 participants. Since the issues addressed are broad and not tied to a specific audit
approach, we did not anticipate nor find any significant firm differences in pre-
negotiation judgments or negotiation strategies used (p ≥ .10).
Pre-Negotiation Phase
Overview
The first phase of the experiment examines auditors’ pre-negotiation judgments
(H1a-H2b) using a 2 x 2 factorial between-subjects design. The manipulated independent
variables are strength of the audit committee (strong or weak) and past negotiation
relationship between the auditor and the client (contending or cooperative).
Auditors were randomly assigned to the four experimental conditions. Participants
completed the experimental tasks (described in the next section) on the internet,
providing convenient access given their busy schedules as well as control over the
negotiation strategies of the client counterpart in the second phase (to be described later).
Importantly, there were no significant or marginally significant demographic differences
(p > .10) between the four experimental conditions, suggesting random assignment of
participants was successful.
2 Sixty-four responses were received. However, due to insufficient negotiation task experience one audit senior was excluded.
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Experimental Tasks
Participants received a realistic case adapted from that used by Trotman et al.
(2005). The case is based on an actual client situation in which the audit team questioned
whether the raw material inventory for a joystick manufacturing company should be
written down due to obsolescence given a deteriorating aging and the short product life
cycle in the industry. Thus, the issue at hand is a subjective matter entailing an estimate
of the lower-of-cost-or-market for the inventory account. Such subjective matters often
entail auditor-client negotiations vis-à-vis an objective, clear cut issue such as a material
recording error where little or no negotiation is required.
Background information was provided about the company (industry, history,
overall controls, and summary financial statements) and the issue at hand. There were a
number of risk indicators present in the case. Importantly, the company is planning to go
public in the near future; thus, there are significant pressures to maintain good earnings,
making this a relatively risky client for the auditor. Further, the client has voiced
opposition to an inventory write down. Finally, a number of key performance indicators
indicate the inventory situation is of concern (e.g., slower inventory turnover than from
the prior year and in comparison to competitors). Participants are then asked to provide
judgments in preparation for discussions with the CFO, their counterpart, regarding their
position and that expected of the CFO.
Manipulation of the Independent Variables
As noted, two variables are manipulated: audit committee effectiveness and past
negotiation relationship. Exhibit 1 shows the manipulations. Audit committee
effectiveness is manipulated as either strong or weak. Consistent with Institutional
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Theory, as discussed previously, the strong manipulation entails audit committee
effectiveness “in substance” while the weak manipulations entails audit committee
effectiveness only “in form”. That is, in the strong condition the audit committee is
described as independent, diligent, and knowledgeable in accounting and auditing.
Further, the audit committee has been granted sufficient power from the board to achieve
its objectives, and the board will side with the audit committee in disputes with
management that are contentious. The weak condition is one where the audit committee
meets minimal standards in form, e.g., independent members, one financial expert, and
all financially literate. However, in substance, the committee is weak, since it meets
infrequently, asks few questions, and has limited power from the board. Further, the
board rarely sides with the audit committee when there is a contentious issue involving
management.
The past relationship is either one in which the counterpart has been contending
or cooperative. The contending relationship is where past negotiations have been difficult
and prolonged, since the client CFO has followed a pattern of adopting a position and
then been largely intransient in revising his position in light of counter-arguments. In
contrast, a cooperative strategy is one where the CFO has been willing to accept
reasonable counter arguments.
We pilot tested the instrument with three audit practitioners and three auditing
professors. The instrument was modified to reflect the comments and suggestions
received.
Dependent Variables
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Prior research exploring auditor negotiation strategies has relied on self-reports of
experiences (e.g., Gibbins et al. 2001) and/or expectations of outcomes (e.g., Ng and Tan
2003). These responses are subject to concerns about accuracy of perceptions and self-
insight, common problems in behavioral research (Libby 1981). In contrast, in the current
study we use the auditor’s direct position and assessments about the client’s preferences.
Negotiators’ assessments about their counterparts’ preferences are found to influence
negotiation behavior (Pruitt and Carnevale, 1993). Participants were asked to provide
their assessment of the CFO’s preferred write down and upper and lower range. The
anticipated CFO range characterizes the parameters within which agreement may be
reached. Therefore, the larger the range, the more likely the auditor expects the CFO to
be flexible and therefore may enter the negotiations with a cooperative attitude. We first
examine whether the auditor’s preferred write down is within the auditor estimate of the
CFO’s upper and lower range, IN RANGE. We code this variable 0 if the auditors
preferred write down is not within the clients range, and 1 if it is within the CFO’s
acceptable range. When the auditor’s preferred write down is outside of the CFO’s
acceptable range, it is unlikely that a solution acceptable to both parties will be reached.
In this situation the auditor is likely to enter the negotiation with a contending
disposition. Alternatively, when the auditor’s preferred write down is within the CFO’s
acceptable range, the opportunity exists to reach a conclusion that is satisfactory to both
parties.
Our second measure is a ratio of the auditor’s preferred write down to the
auditor’s assessment of the CFO’s acceptable range (auditor’s preferred write down –
CFO’s lower range/ [CFO upper range – CFO lower range]), NRATIO. A higher ratio
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would suggest that the auditor is less flexible and more likely to enter the negotiation
with a contending attitude, whereas a lower ratio would allow room to find a solution
acceptable to both parties and the auditor would likely be more amenable to making
concessions.3,4 We control for the auditor’s reported beliefs about the strategy they will
use when entering negotiations with the CFO (Reported Strategy). Auditors were asked
to select a negotiation strategy that best described their intended strategy on a 5 point
scale, ranging from concessionary to contending.5
Negotiation Phase
The second phase of the experiment is an extension of the prior phase utilizing the
same participants to control for potential confounding effects such as differences in pre-
negotiation judgments and in task or domain experience. Both phases were designed so
that they could be completed in about 40 minutes over the internet. In the second phase
3 For instance, assume the auditor believes the CFO’s negotiation range is $0 (lower end) to $300 (upper range), and the auditor indicates a preferred write down of $300. NRATIO is 1.00 [(300-0)/300]. This value suggests the auditor is employing a contending strategy with a write down at the high end of the CFO range. Instead, assume the same expected CFO range and an auditor preferred write down of $100. The NRATIO would be .33 [(100-0)/300], indicating a willingness to provide a write down well within the CFO’s acceptable range. This suggests a more concessionary strategy. This assumes the auditor believes some write down is needed (i.e., greater than $0), and is greater than or equal to the CFO’s minimum acceptable write down. Participant responses support these assumptions. 4 To avoid distortions due to extreme values, NRATIO is constrained to a maximum value of 18. For two participants NRATIO takes on very high values, and we, thus, include the next highest value (18) in these cases. We also set NRATIO to the maximum value (18) where the assumed client range is $0 and the auditor’s preferred write down is greater than zero (n = 8). In such cases NRATIO cannot be calculated and the auditor’s position indicates a very strong contending strategy.
5 Auditors responses were based on a five point scale where the strategies range on a scale from highly concessionary to highly contending, as follows: 1= concessionary (I would accept the CFO’s position); 2= compromising (I would work to arrive at a compromise halfway between that proposed by the audit staff and by the CFO); 3= integrative (I would consider additional options) 4 = strictly compromising (I would listen to the CFO’s arguments and accept a reasonable compromise between that proposed by the audit staff and by the CFO); and 5= contending (I would insist on an inventory write down that the audit staff proposed).
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auditors were engaged in negotiations with a computerized-counterpart (the CFO). If a
participant accepts the position of the counterpart, agreement is reached and negotiations
are ended. Unbeknownst to participants there were a maximum of five negotiation rounds
to reach agreement. If no agreement is obtained at that time, participants were asked what
actions they would take at this point. In each round the participant can accept the CFO’s
position or provide a counter-position. They were also asked to provide an explanation to
the CFO for their counter-position.
The strategy of the CFO was held constant and reflected a relatively contending
one. That is, the CFO proposed a write down of $150,000 in negotiation rounds 1-3,
$175,000 in round 4 and $200,000 in round 5. Thus, the CFO gives little ground over the
course of the negotiations, should negotiations continue. Such a strategy by the client is
of highest risk and difficulty for the auditor, since this represents greater client pressures
on the auditor to acquiesce. Such a setting is also of greatest risk to investors, who rely on
the auditors to deter the client from engaging in inappropriate behavior.
Dependent Variables
Our first variable that reflects the actual strategy pursued by the auditor is the
monetary concessions made during the negotiation, i.e., [(auditors preferred write down -
final offer) CONCESSION. Our second variable is the FINAL OFFER, which is the
alternative the auditor was willing to agree to in the final round of the negotiation. Lower
final offers indicate that the auditor is willing to accept a lower write down and more
aggressive CFO position.
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Control variables
In our CONCESSIONS model, we control for the auditor’s solution set, i.e., the
difference between what they believe the appropriate write down is less the lowest write
down they will accept. It seems logical that the concessions the auditor is willing to
make will be constrained within this solution set. We also control for the auditor’s limit,
LIMIT which represents the lowest write down the auditor is willing to accept in both the
CONCESSIONS and FINAL OFFER models. Research finds higher limits produce higher
initial demands and lower concession making (Kelley et al. 1967, Yukl 1974) and to
lower and fewer agreements (Ben-Yoav and Pruitt 1984, Neale and Bazerman 1985,
Pruitt and Lewis 1975).
RESULTS
Manipulation Checks
We employed two manipulation check questions to determine whether
participants encoded the experimental conditions as intended. The first question asked:
“In the case you just completed how strong do you think the audit committee at VCC is
in helping to resolve contentious accounting issues?” Responses were on a scale from
one (very weak) to seven (very strong). “The mean (standard deviation) responses were
3.10 (1.47) and 5.21 (1.01) for auditors in the weak audit committee and the strong audit
committee conditions, respectively. The difference in means is significant (t = 6.652, p =
0.000). The second question stated: “What do you think best describes the past
relationship you have had with the CFO in his approach to dealing with difficult
accounting issues?” Responses were on a scale from one (cooperative) to seven
(contending). The mean (standard deviation) responses were 3.19 (1.62) and 5.64 (1.41)
21
for auditors in the cooperative client and the contending client conditions, respectively.
The difference in means is significant (t = -6.44, p = 0.000). The difference in means for
both questions indicates successful experimental manipulations.
Results of the Pre-negotiation Phase
The results in Table 1 provide analyses to test H1a-H2b. We investigate whether
pre-negotiation judgments will be more reflective of a contending strategy when the audit
committee is strong than weak (H1a) and when the past negotiation relationship has been
contending than cooperative (H2b). We use LOGIT and ANCOVA models to test our
hypotheses, with the dependent variables IN RANGE and NRATIO providing measures of
pre-negotiation strategies6.
For IN RANGE we use a LOGIT model (Panel A of Table 1) and find the
coefficient on AUDIT COMMITTEE statistically significant (p = 0.048) and the
coefficient on PAST RELATIONSHIP negative and statistically significant ( p = 0.015).
Panel C of Table 1 shows descriptive statistics for each of the experimental conditions.
As indicated, auditors are more likely to take a position (preferred write down) within the
CFO’s range, suggesting a compromising negotiation strategy, when the audit committee
is weak (mean= 0.533) than strong (mean= 0.333) [p= 0.056] and when the CFO has
been cooperative (mean= 0.567) than contending (mean= 0.303) [p= 0.017]. These results
provide support for H1a and H2a.
For NRATIO we use an ANCOVA (Panel B of Table 1) and find a significant
main effect of AUDIT COMMITTEE only (F = 3.279, p = 0.0375). The ratio is higher
when the audit committee is strong (mean=7.07) than when it is weak (mean= 3.82
[p=0.047]), suggesting a more contending strategy. This finding supports H1a. We do not 6 The two dependent variables are not significantly correlated (-0.153, p =0.230).
22
find an interactive effect of AUDIT COMMITTEE X PAST RELATIONSHIP in the pre-
negotiation phase.
The results for the two dependent variables examined are generally supportive of
H1a and H2a (i.e., IN RANGE, and NRATIO). When the CFO’s preference is factored
into the pre negotiation assessments (i.e., IN RANGE and NRATIO) auditors are more
contending when the audit committee is strong and the past CFO relationship has been
contentious.
Results of the Negotiation Phase
Results in Table 2 provide analyses for H1b and H2b. We investigate how audit
committee effectiveness and past negotiation relationship impact the negotiation strategy
actually used during the negotiation process. Analysis of the negotiation rounds reveal
that approximately 75% of participants did not reach an agreement at the end of the 5th
round, opting instead to take further action (e.g., take the matter to the audit committee).
Because of the significant correlation among the dependent measures in our analysis
(r=.344, p=0.006), we initially use a MANCOVA with the dependent variables
CONCESSION and FINAL OFFER measuring the negotiated strategy employed.
The MANCOVA results revealed a significant main effect for PAST
RELATIONSHIP (p <.05) and a significant interactive effect of AUDIT COMMITTTEE x
PAST RELATIONSHIP (p = 0.05). Given the significant effects of the MANCOVA,
individual ANCOVAs were conducted for each of the dependent variables to test the
hypotheses. Table 2, Panel A shows the results of these analyses. With regard to
CONCESSIONS, PAST RELATIONSHIP is found to be significant (F=3.207; p= .015)
23
and the interaction between AUDIT COMMITTEE and PAST RELATIONSHIP is
marginally significant (F=2.212; p=.071).
As shown in panel B of Table 2, the lowest CONCESSIONS occur when the past
negotiation relationship was contentious (mean = $-1,121) as compared to a cooperative
past relationship (mean = $121,467) [p = 0.034], especially when the audit committee is
strong (mean= -$41,225). Past relationship appears to drive the auditor’s decision
regarding concessions since a cooperative past relationship results in the greatest amount
of concessions. Perhaps in situations where the client seems to be flexible, the auditor is
willing to work with the client to arrive at a solution acceptable to both parties. It is
important to note that while auditors were willing to make concessions, they still engaged
in a largely contending strategy in that they moved very little from their goal or preferred
write down (mean $57,254). As noted above, most auditors did not reach agreement with
the client. The findings on CONCESSIONS support H1b and H2b.
With respect to negotiation FINAL OFFER there is a significant interaction of
AUDIT COMMITTEE X PAST RELATIONSHIP (F = 5.846, p = 0.009), a significant
main effect of PAST RELATIONSHIP (F = 6.607, p = 0.006) and a marginally significant
main effect of AUDIT COMMITTEE (F = 1.872, p = 0.08). Again the results suggest that
audit committee strength and past relationship influence auditor negotiation decisions. As
shown in panel B, the mean FINAL OFFER is highest in the strong audit committee, past
contentious condition ($773,706) and lowest in the weak audit committee, past
cooperative condition ($525,714), again providing support for H1b and H2b.
Our overall conclusions are that past relationship and audit committee strength
affect the negotiation strategy used by the auditor. When the audit committee is strong,
24
auditors are likely to regard this as bolstering their bargaining power and they take on a
more contending stance in negotiations. This is especially evident when the CFO has
been contentious in the past. In this situation, the auditor makes no concessions and
insists on the highest write down. Further, only 3 of 17 auditors in the strong audit
committee, contending condition were able to reach agreement with the CFO.
Additional Findings
We also examine a second measure reflective of the negotiation strategy used,
implied by the difference between the auditor’s preferred write down prior to starting the
negotiation and the final offer. There are three strategies implied by the pattern of
auditors’ most preferred write down and final offers: a contending strategy, a
compromising strategy, and a conceding strategy. We infer a contending strategy when
the auditor refuses to yield to the client’s preference (e.g., the auditor’s most preferred
write down and the final offer are the same, or the final offer is higher than the auditor’s
preferred write down).
We infer the compromising and conceding strategies by considering the dollar
amount if the auditor and client “split the difference” (Neale & Bazerman 1985; Kramer
& Pommerenke 1993) between their respective pre-negotiation preferences. In our case,
“splitting the difference” is calculated as the difference between the client’s initial
preference (say, $150,000) and the auditor’s preferred write down (say, $600,000)
divided by 2. We infer a conceding strategy when the auditor’s concessions are greater
than the “splitting the difference” amount ($600,000-$150,000/2=$225,000). We infer a
compromising strategy for all the other bidding patterns since the dollar amounts
associated with this strategy fall between those associated with the contending and
25
conceding strategies. In our example, we infer a conceding strategy when the final offer
is $250,000 (a concession of $350,000 below the auditor’s preferred choice of $600,000);
we infer a compromising strategy when the final offer is $500,000 (a concession of
$100,000).
During the pre negotiation phase only 16% of auditors reported in an objective
choice question (Reported Strategy) that they plan to use a contending strategy.
However, using the implied strategy measure described above we find that during actual
negotiations with the client 44% of auditors actually appeared to use a contending
strategy (Table 3), which represents a significant shift in strategy (t = -4.528, p =0.000).
This result may be driven by findings that indicate auditors generally perceive themselves
to be compromising and/or integrative when resolving issues with clients (Brown and
Johnstone 2007, Goodwin 2002). However, when put in a context where they have to
consider the client’s expectations and preferences they generally view the negotiation
from a distributive perspective, i.e., persuading the other party (Gibbins et al 2005,
Brown and Johnstone 2007).
We also examine auditors’ subsequent actions and how audit committees are
likely utilized in negotiation situations when auditors and clients disagree about an issue.
We asked participants to indicate in an open ended question the action they would take if
they were not able to reach an agreement at the end of the five rounds. Forty-seven
participants did not reach agreement by round 5 of the negotiation. We coded their
responses into five categories: request more information from the CFO (1); meet with the
CEO (2); go to the audit committee (3); discuss the issue with other partners in the audit
firm (4); or take other actions (5). We independently coded participant responses using
26
this qualitative scale. The inter-rater agreement was 85%, indicating a high level of
agreement. All differences were subsequently reconciled.
Overall, the results suggest that when the audit committee is weak, auditors try to
resolve the issue with management. Specifically, we find that in the weak audit
committee condition, 4 of the 19 auditors (21%) indicated that they would take the matter
to the audit committee as compared to 10 of 27 auditors (37%) in the strong audit
committee condition.7 We further collapsed responses into a 1 (continue to work with
management to resolve the issue; actions 1 and 2, above) and 2 (end discussions with
management and go to other third parties; actions 3, 4, and 5, above). Of the 46 auditors,
18 of 27 auditors (67%) in the strong audit committee condition indicated that they would
terminate discussions with the client as compared to 7 of 19 auditors (37%) in the weak
audit committee condition8. Again, the results seem to suggest that when the audit
committee is weak, auditors will try to resolve the issue with management and not
involve the audit committee or other partners.
CONCLUSIONS
Auditors and clients must often resolve difficult, complex accounting and
disclosure issues. Thus, it is important to examine factors that drive the judgments and
strategies that are employed in this process, since the quality of financial reporting is
directly impacted. Drawing on the auditing and negotiations literature, we use a
controlled experiment to examine the impact of two contextual factors [the auditor-CFO
past relationship (cooperative or contending) and the strength of the audit committee
7 Chi-square results indicate no significant differences (5.229, p = 0.265), likely due to the small cell sizes in each condition. Additionally, chi-square results for past relationship is also insignificant (.063, p = 0.801). 8 Chi-square results indicate significant differences (3.998, p = 0.046). We find no significance for past relationship (0.122, p = 0.727).
27
(strong or weak)] on auditors’ pre-negotiation planning judgments and on the strategy
employed during the negotiation process. We expect auditors to be more contending
when the audit committee is strong and when the past CFO relationship has been
contending.
In the pre-negotiations planning phase the results indicate the auditor’s preferred
position is less likely to be within the CFO’s range when the audit committee is strong
and the CFO has been contentious in the past. This finding is consistent with our
hypotheses. Further, the relative position of the auditor’s preferred position within the
CFO’s range is also at a higher level (contending) when the audit committee is strong,
supportive of our hypothesis.
The findings regarding the strategy auditors used during the negotiation process
suggest auditors are more likely to use a contending strategy when the audit committee is
strong and the past negotiation relationship has been contentious, while a compromising
strategy is more prevalent when the audit committee is weak and the past relationship has
been cooperative. That is, the lowest auditor concession and highest final offer occurs
when the audit committee is strong and the past relationship was contentious. These
results are consistent with our expectations.
In all, the findings suggest a significant impact of audit committee strength and
past relationship on pre-negotiation planning judgments and the choice of a negotiation
strategy to employ to resolve a contentious accounting issue, highlighting the importance
of these contextual factors. The results corroborate the importance of a strong audit
committee in enhancing the relative bargaining position of the auditor, providing further
support for the provisions of the Sarbanes-Oxley Act that seek to strengthen the
28
responsibilities, expertise, and authority of the audit committee. However, at the same
time the results also underscore the difficulties auditors face when dealing with a client
that has a weak audit committee in resolving contentious accounting issues. This situation
raises the important practice and research issue of considering the efficacy of other
contextual factors in such circumstances that may compensate for a weak audit
committee such as a strong second partner review or a powerful, independent board of
directors.
The findings also highlight the importance of the past relationship with a client
counterpart. Noteworthy is that auditors are found to be more vigilant when facing a
contentious CFO, which appears appropriate to address greater risks of a potential
misstatement(s). However, auditors must be cautious in not responding to a cooperative
CFO by, in turn, becoming too concessionary. In our experiment the CFO adopted a
relative contending negotiation strategy. It would be insightful to extend this work by
also examining the extent to which auditors alter their negotiation strategy in the presence
of a cooperative, more flexible client counterpart.
We also provide a context where the client inherent risks are moderately high and
where the auditor and client are called upon to resolve a subjective accounting issue.
Future research that examines the extent to which auditors are (and should be) adaptive in
the choice of negotiation strategies to reflect variations in these and other contextual
factors is promising. Further, our study focuses on the pre-negotiations and negotiations
phases, which can be extended to also examine the impact of contextual factors on
negotiation outcomes. Finally, the current study examines a single period negotiation
whereas negotiations between auditors and management are usually of a continuing,
29
multi-period nature. While we recognize this contextual feature in the audit environment
when examining the impact of past relationship, we do not investigate how negotiation
strategies may evolve over multiple periods, another fruitful issue for future research.
30
TABLE 1 Panel A. LOGIT Analysis of Pre-Negotiation Strategies (IN RANGE) Variable
Coefficient Wald Chi-Square
Audit Committee 0.911 2.771** Past Relationship -1.193 4.698*** Control Variable: Reported Strategy
-0.140
0.115
Panel B. ANCOVA Analysis of Pre-Negotiation Strategies (NRATIO)
Variable
DV=NRATIO
Audit Committee 140.73 3.279**
Past Relationship
15.68 0.365
Audit Committee X Past Negotiation Relationship
26.09 0.608
Control Variable: Reported Strategy
115.23 2.685**
Panel C. Descriptive Statistics Past Negotiation Relationship Cooperative Contentious Total
Weak N = 14
IN RANGE = 0.714 (0.469)
NRATIO = 3.631 (5.017)
N = 16
IN RANGE = 0.375 (0.500)
NRATIO = 4.437 (5.74)
N = 30
IN RANGE = 0.533 (0.507)
NRATIO = 4.061 (5.339) Audit Committee
Effectiveness Strong
N = 16
IN RANGE = 0.437 (0.512)
NRATIO = 7.965 (8.088)
N = 17
IN RANGE = 0.235 (0.437)
NRATIO = 5.716 (7.08)
N = 33
IN RANGE = 0.333 (0.479)
NRATIO = 6.810 (7.551)
Total N = 30
IN RANGE = 0.567 (0.504)
NRATIO = 5.943 (7.068)
N = 33
IN RANGE = 0.303 (0.467)
NRATIO = 5.096 (6.398)
N = 63
IN RANGE = 0.4286 (0.499)
NRATIO = 5.499 (6.683) Notes to tables:
1. Values in cells represent the mean square and F-value. ***, **, and * represent significance at the 0.01, 0.05, 0.10 level, respectively. Reported probabilities are one-tailed for the directional expectations in the hypothesis tests.
2. IN RANGE= Auditor preferred choice within client bargaining range (no=0; yes=1); NRATIO = auditor’s preferred write down – client’s lower range / [$difference of the upper and lower ranges of the client’s acceptable write down based on the auditor’s assessment]. AUDIT COMMITTEE = 1 for the weak audit committee manipulation, = 0 for the strong audit committee manipulation. PAST RELATIONSHIP = 1 for the contentious past relationship manipulation, = 0 for the cooperative past relationship
31
manipulation. Reported Strategy= auditor’s description of the strategy they are most likely to use during negotiations with the client: 5 point scale: 1=concessionary, 2=compromising, 3=integrative, 4=strictly compromising, and 5=contending.
3. Descriptive data represent the mean (standard deviation). PREFERRED WRITEDOWN= $ of auditor’s preferred write down prior to negotiation.
32
TABLE 2
Analyses of Strategy Used During the Negotiation Process
Panel A: ANCOVA Results Variable
DV= CONCESSIONS DV= FINAL OFFER
Audit Committee 4.863 0.741
1.387 1.872*
Past Relationship
3.206 4.881***
4.897 6.607***
Audit Committee X Past Negotiation Relationship
1.453 2. 212*
4.334 5.846***
Control Variables: SOLUTION SET 3.687
5.614***
LIMIT 1.488 0.227
1.409 190.05***
Panel B. Descriptive Statistics
Past Negotiation Relationship Cooperative Contentious Total
Weak
N = 14 CONCESSIONS =$105,142 ($137,261) FINAL OFFER = $525,714 ($433,513)
N = 16 CONCESSIONS =$41,500 ($216,438) FINAL OFFER = $705,750 ($639,140)
N = 30 CONCESSIONS =$-71,200 ($184,617) FINAL OFFER = $621,733 ($551,257) Audit
Committee Effectiveness
Strong
N = 16 CONCESSIONS =$135,750 ($323,500) FINAL OFFER = $669,250 ($580,107)
N = 17 CONCESSIONS =$-41,235 ($-315,918) FINAL OFFER = $773,706 ($545,952)
N = 33 CONCESSIONS =$-44,575 ($327,148) FINAL OFFER = $723,060 ($556,405)
Total
N = 30 CONCESSIONS =$-121,467 ($251,360) FINAL OFFER = $602,267 ($513,434)
N = 33 CONCESSIONS =$1,121 ($271,337) FINAL OFFER = $740,758 ($584,555)
N = 63 CONCESSIONS =$-57,253 ($267,135) FINAL OFFER = $674,810 ($551,841)
33
Notes to table: 1. Values in cells represent the mean square and F-value. ***, **, and * represent significance at the 0.01, 0.05, 0.10 level, respectively. Reported probabilities are one-tailed for the directional expectations in the hypothesis tests. 2. CONCESSIONS = [($preferred write down-$final offer)]. FINAL OFFER = $ of final alternative to which auditor proposed in final round. PREFFERED WRITEDOWN = $ of auditor’s preferred write down prior to negotiation. 3. AUDIT COMMITTEE = 1 for the weak audit committee manipulation, = 0 for the strong audit committee manipulation. PAST RELATIONSHIP = 1 for the contentious past relationship manipulation, = 0 for the cooperative past relationship manipulation. 4. SOLUTION SET = difference between the auditor’s preferred write down and the auditor’s limit. LIMIT = the lowest write down the auditor is willing to accept.
1
Table 3
Frequencies: Auditor’s Pre-Negotiation and Negotiation Strategies
Pre-Negotiation Phase (Experiment 1) Negotiation Phase (Experiment 2)
Past Negotiation Relationship Past Negotiation Relationship Cooperative Contentious Total Cooperative Contentious Total Strategy Frequency
(Number)
Strategy Frequency
(Number)
Frequency
(Number)
Strategy Frequency
(Number)
Strategy Frequency
(Number)
Frequency
(Number)
Audit Committee
Effectiveness Weak
N = 14
Contend
Other
14% (2)
86% (12)
N = 16
Contend
Other
19% (3)
81% (13)
N = 30
17% (5)
835% (25)
N = 14
Contend
Other
43% (6)
57% (8)
N = 16
Contend
Other
37% (6)
63% (10)
N = 30
40% (12)
60% (18)
Strong
N = 16
Contend
Other
19% (3)
81% (13)
N = 17
Contend
Other
12% (2)
88% (15)
N = 33
15% (5)
85% (28)
N = 16
Contend
Other
44% (7)
56% (9)
N = 17
Contend
Other
53% (9)
47% (8)
N = 33
48% (16)
52% ( 17)
Total
N = 30
Contend
Other
17% (5)
83% (25
N = 33
Contend
Other
15% (5)
85% (28)
N=63
16% (10)
84% (53))
N = 30
Contend
Other
43% (13)
57% (17)
N = 33
Contend
Other
45% (15)
55% (18)
N=63
44% (28)
56% (35)
Notes to Table:
1. Strategies in the pre-negotiation phase are determined based on auditor’s self reported planned strategy based on an objective choice question. Strategies in the negotiation phase are based on that implied by the difference between the auditor’s preferred write down prior to starting the negotiation and the final offer.
2. Strategies included in the “other” category are compromising, integrative and concessionary.
1
EXHIBIT 1 Manipulation of Independent Variables
Audit Committee Effectiveness (labeled as “Corporate Governance” in instrument):
Strong Audit Committee Manipulation:
VCC has a board of directors of nine members, three from management (including the president) and six independent, outside individuals. The audit committee is composed of three individuals, who are all independent. Two of the members have extensive experience in public accounting and the third member is financially literate. You have been very impressed with the audit committee’s high level of diligence in representing shareholders’ interests. They ask many probing questions and meet very frequently. Finally, the board has granted the audit committee a high level of power in executing its authority and almost always sides with the audit committee on contentious issues involving management. Weak Audit Committee Manipulation: VCC has a board of directors of nine members, three from management (including the president) and six independent, outside individuals. The audit committee is composed of three individuals, who are all independent. One of the members is a CPA and has 5 years of experience in public accounting. The other two members are financially literate. Your experience with the audit committee is that they ask very few questions and meet two times a year. Finally, the board has granted the audit committee limited power in executing its authority and very rarely will the board side with the audit committee on contentious issues involving management. Past Negotiation Relationship:
Contending Relationship Manipulation: In the past you have had a difficult relationship with the CFO in resolving difficult issues. The CFO tends to stick to his position and be intransient, failing to listen to counter arguments. As a result, interactions involving contentious issues have been prolonged and difficult.
Cooperative Relationship Manipulation:
In the past you have had a cooperative relationship with the CFO in resolving difficult issues. He has been willing to accept reasonable counter arguments. As a result, interactions involving contentious issues have not been prolonged or difficult.
2
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