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Auditor-client management relationships and roles in negotiating financial reporting

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  • McCracken, Susan
  • Salterio, Steven E.
  • Gibbins, Michael

Abstract

We carry out an interview based field study of chief financial officer (CFO)-audit partner dyads to examine the assumption that the roles played by each side and the nature of the relationships are similar across negotiations. These dyads freely discussed with us their relationship, a specific issue negotiated and it's resolution process. Employing the lens of social positioning negotiation research, we find these negotiations are 'fluid', with continual redefinition not only of the substantive issues under negotiation, but also of the negotiation roles and relationships (i.e. 'shadow' negotiations). The CFO's actions and expectations in these 'shadow' negotiations appear to define the auditor's role and the relationship's parameters, but both can evolve over time. The audit partners express a desire to be in the "ideal" relationship where they assume the role of the 'expert advisor' (as opposed to a 'police officer') but they seemingly have no explicit strategy to move the relationship toward a 'proactive' (rather than 'reactive') state. Furthermore, the audit partner is always the 'relationship manager' whose job it is to see that client management remains "happy". These roles and relationships negotiated in the 'shadows' also affect how the negotiation process unfolds, including the set of alternative accounting treatments considered during negotiations. Finally, audit firms appear to manage the assignment of partners to engagements based on CFO preferences and remove those partners who are in "poor" relationships, irrespective of why the relationship is considered by the CFO to be "poor". Implications for the broader research program on auditor-client management negotiations are discussed.

Suggested Citation

  • McCracken, Susan & Salterio, Steven E. & Gibbins, Michael, 2008. "Auditor-client management relationships and roles in negotiating financial reporting," Accounting, Organizations and Society, Elsevier, vol. 33(4-5), pages 362-383.
    • Handle: RePEc:eee:aosoci:v:33:y:2008:i:4-5:p:362-383
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    Cited by:

    1. Laurence Daoust & Bertrand Malsch, 2020. "When the Client Is A Former Auditor: Auditees' Expert Knowledge and Social Capital as Threats to Staff Auditors' Operational Independence†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1333-1369, September.
    2. Jorgensen, Bjorn N. & Morley, Julia, 2017. "Discussion of “are related party transactions red flags?”," LSE Research Online Documents on Economics 80801, London School of Economics and Political Science, LSE Library.
    3. Yim, Andrew, 2013. "Mixture and Continuous 'Discontinuity' Hypotheses: An Earnings Management Model with Auditor-Required Adjustment," MPRA Paper 44702, University Library of Munich, Germany.
    4. Svanberg, Jan & Öhman, Peter & Neidermeyer, Presha E., 2019. "Auditor objectivity as a function of auditor negotiation self-efficacy beliefs," Advances in accounting, Elsevier, vol. 44(C), pages 121-131.
    5. Roussy, Mélanie, 2013. "Internal auditors’ roles: From watchdogs to helpers and protectors of the top manager," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 24(7), pages 550-571.
    6. Bryan K. Church & Narisa Tianjing Dai & Xi (Jason) Kuang & Xuejiao Liu, 2020. "The Role of Auditor Narcissism in Auditor–Client Negotiations: Evidence from China," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1756-1787, September.
    7. repec:mth:ijafr8:v:8:y:2018:i:2:p:166-178 is not listed on IDEAS
    8. Duff, Angus & Einig, Sandra, 2009. "Understanding credit ratings quality: Evidence from UK debt market participants," The British Accounting Review, Elsevier, vol. 41(2), pages 107-119.
    9. Jones, Joanne & MacTavish, Carolyn & Schultz, Wendy, 2019. "The effect of gender and firm identification on auditor pre-negotiation judgments," Advances in accounting, Elsevier, vol. 44(C), pages 49-57.
    10. Haislip, Jacob Z. & Peters, Gary F. & Richardson, Vernon J., 2016. "The effect of auditor IT expertise on internal controls," International Journal of Accounting Information Systems, Elsevier, vol. 20(C), pages 1-15.
    11. Gipper, Brandon & Hail, Luzi & Leuz, Christian, 2021. "Determinants and career consequences of early audit partner rotations," CFS Working Paper Series 676, Center for Financial Studies (CFS).
    12. Krishnan, Gopal V. & Singer, Zvi & Zhang, Jing, 2023. "Audit partner ethnicity and salient audit phenomena," Accounting, Organizations and Society, Elsevier, vol. 107(C).
    13. Yan Luo & Steven E. Salterio, 2021. "Toward an Archival Measure of the Likelihood of Auditor‐Client Management Negotiation: An Exploration of the Audit Lag Measures Conjecture†," Accounting Perspectives, John Wiley & Sons, vol. 20(1), pages 109-143, March.
    14. Raymond A. Ezejiofor & Nwakoby, Nkiru Peace & Okoye, F. N. Jane, 2016. "Impact Of Forensic Accounting On Combating Fraud In Nigerian Banking Industry," International Journal of Academic Research in Management and Business, International Journal of Academic Research in Management and Business, vol. 1(2), pages 1-19, September.
    15. Perreault, Stephen & Kida, Thomas, 2011. "The relative effectiveness of persuasion tactics in auditor–client negotiations," Accounting, Organizations and Society, Elsevier, vol. 36(8), pages 534-547.
    16. Obermire, Kara M. & Cohen, Jeffrey R. & Zehms, Karla M., 2021. "Audit committee members’ professional identities: Evidence from the field," Accounting, Organizations and Society, Elsevier, vol. 93(C).
    17. Chen, Qiu & Kelly, Khim & Salterio, Steven E., 2012. "Do changes in audit actions and attitudes consistent with increased auditor scepticism deter aggressive earnings management? An experimental investigation," Accounting, Organizations and Society, Elsevier, vol. 37(2), pages 95-115.
    18. Elisabeth Bertin & Christophe Godowski, 2010. "Interactions entre les acteurs du processus global d'audit et gouvernance de l'entreprise : une étude exploratoire," Post-Print hal-00477399, HAL.
    19. Raymond A. Ezejiofor & Nkiru Peace Nwakoby & Jane F. N. Okoye,, 2016. "Impact Of Forensic Accounting On Combating Fraud In Nigerian Banking Industry," Post-Print halshs-01359758, HAL.
    20. Blaufus, Kay & Lorenz, Daniela & Milde, Michael & Peuthert, Benjamin & Schwäbe, Alexander N., 2022. "Negotiating with the tax auditor: Determinants of tax auditors' negotiation strategy choice and the effect on firms’ tax adjustments," Accounting, Organizations and Society, Elsevier, vol. 97(C).
    21. Marie Caussimont & David Carassus, 2015. "L’audit financier en contexte territorial : vers un audit de performance de la gestion locale ?," Post-Print hal-02141946, HAL.
    22. Saiewitz, Aaron & Kida, Thomas, 2018. "The effects of an auditor's communication mode and professional tone on client responses to audit inquiries," Accounting, Organizations and Society, Elsevier, vol. 65(C), pages 33-43.
    23. Krista Fiolleau & Kris Hoang & Karim Jamal & Shyam Sunder, 2013. "How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice?," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 864-890, September.
    24. Steven E. Salterio, 2008. "A Strategy for Dealing with Financial Reporting Fraud: Fewer Mandates, More Auditing," Accounting Perspectives, John Wiley & Sons, vol. 7(2), pages 111-122, May.
    25. X. Walthoff-Borm & L. Chalmet, 2013. "Behind closed doors: the potential of lean management in safety audit services," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 13/838, Ghent University, Faculty of Economics and Business Administration.

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