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The Relationship of Cognitive Effort, Information Acquisition Preferences and Risk to Simulated Auditor–Client Negotiation Outcomes

Author

Listed:
  • Gary Kleinman

    (Montclair State University)

  • Dan Palmon

    (Rutgers Business School)

  • Kyunghee Yoon

    (Rutgers Business School)

Abstract

The auditor–client relationship is a legally-mandated relationship in which one party, the auditor, is hired and paid by the auditee (client) to inform third party stakeholders as to whether the client firm’s financial statements are presented in conformity with national financial accounting standards. When these statements do not meet the criteria for acceptable financial statements, a negotiation situation may arise in which the auditor is presumed to act in the best interests of shareholders and creditors who have no independent knowledge of the auditor’s findings. The client management may then feel forced to defend its numbers. The result is a negotiation between the auditor and client (e.g., Salterio in Account Financ 52:233–286, 2012; Brown and Wright in Account Horiz 22(1):91–109, 2008). This study examines cognitive factors and risk preference factors that may impact the negotiation both in the setting of each side’s negotiation position and on the outcomes of that negotiation using simulated auditor–client negotiations. Questionnaire and simulated auditor–client negotiations were used to generate the data, with MBA and MS in Accounting students playing the role of client CEOs and auditor partners. We further explore the use of a tool, Structural Equation Modeling, to test the data, in the process highlighting its usefulness in auditor–client negotiation research. We find that the cognitive characteristic of need for cognition is significantly and positively related to achievement of the negotiator’s desired income objectives and reported willingness to argue strongly for his/her position. Actively open-minded thinking, a second cognitive variable studied, was not significantly related to success in the negotiations, nor to a reported willingness to argue strongly for his/her position. Finally, we find that perceived aggressive tactics by the other party to the negotiation had a negative impact on the counterpart negotiator’s success in the negotiation, and satisfaction with it. As expected, risk assessment-related variables were not related to outcomes of interest.

Suggested Citation

  • Gary Kleinman & Dan Palmon & Kyunghee Yoon, 2014. "The Relationship of Cognitive Effort, Information Acquisition Preferences and Risk to Simulated Auditor–Client Negotiation Outcomes," Group Decision and Negotiation, Springer, vol. 23(6), pages 1319-1342, November.
    • Handle: RePEc:spr:grdene:v:23:y:2014:i:6:d:10.1007_s10726-013-9371-5
    DOI: 10.1007/s10726-013-9371-5
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    References listed on IDEAS

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    1. Paul M. Romer, 2000. "Thinking and Feeling," American Economic Review, American Economic Association, vol. 90(2), pages 439-443, May.
    2. Gary Kleinman & Asokan Anandarajan & Ann Medinets & Dan Palmon, 2010. "A theoretical model of cognitive factors that affect auditors' performance and perceived independence," International Journal of Behavioural Accounting and Finance, Inderscience Enterprises Ltd, vol. 1(3), pages 239-267.
    3. Lawrence P. Kalbers & William J. Cenker, 2007. "Organizational commitment and auditors in public accounting," Managerial Auditing Journal, Emerald Group Publishing, vol. 22(4), pages 354-375, April.
    4. Gary Kleinman & Dan Palmon & Picheng Lee, 2003. "The Effects of Personal and Group Level Factors on the Outcomes of Simulated Auditor and Client Teams," Group Decision and Negotiation, Springer, vol. 12(1), pages 57-84, January.
    5. Libby, Robert & Luft, Joan, 1993. "Determinants of judgment performance in accounting settings: Ability, knowledge, motivation, and environment," Accounting, Organizations and Society, Elsevier, vol. 18(5), pages 425-450, July.
    6. Parker, Robert J. & Kohlmeyer, James III, 2005. "Organizational justice and turnover in public accounting firms: a research note," Accounting, Organizations and Society, Elsevier, vol. 30(4), pages 357-369, May.
    7. Gary Kleinman & Dan Palmon, 2009. "Procedural Instrumentality and Audit Group Judgment: An Exploration of the Impact of Cognitive Fallibility and Ability Differences," Group Decision and Negotiation, Springer, vol. 18(2), pages 147-168, March.
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    Cited by:

    1. Anna Che Azmi & Yuen Hoong Voon, 2016. "The Effect of Clients’ Auditing Experience and Concession-Timing Strategies on Auditor-Client Negotiations," Group Decision and Negotiation, Springer, vol. 25(5), pages 1049-1069, September.
    2. Pyung Kyung Kang & Yoo Chan Kim & Dan Palmon, 2020. "Client’s Bargaining Power and Audit Negotiation over Earnings: Evidence from Audit Processes in a Business Groups Environment," Group Decision and Negotiation, Springer, vol. 29(6), pages 1207-1238, December.

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