DQ

The Effect of Deadline Pressure on Pre-Negotiation Positions:

A Comparison of Auditors and Client Management*

G. BRADLEY BENNETT, University of Massachusetts Amherst

RICHARD C. HATFIELD, The University of Alabama

CHAD STEFANIAK, Central Michigan University

1. Introduction

We compare the pre-negotiation judgments of auditors and chief financial officers (CFOs) to consider both their generally disparate concessionary behavior, as well as the potential impact of deadline pressure brought on by the end of the audit. Such deadline pressure is common, yet different from many nonaudit contexts in that audit deadlines are often imposed by regulatory agencies (e.g., SEC filing deadlines). In recent years, regulators fur- ther constrained auditing and financial reporting deadlines through “accelerated” year-end filing requirements (e.g., SEC 2005). In this study, we consider the possibility that this pres- sure may influence auditors differently than it does the audit client. Negotiations between auditors and their clients occur frequently (Gibbins, Salterio, and Webb 2001) and have a direct effect on the quality of audited financial statements (cf., Brown and Wright 2008). Thus, negotiations are a crucial link between audit quality and financial statement quality. Prior audit research suggests that a great deal of these discussions take place near the end of the audit. For example, Gibbins, McCracken, and Salterio (2007) find that 64 percent of their auditor participants resolved some audit issues at year-end. Further, this study is unique in that it considers how a characteristic of negotiations—the deadline—may differ- ently affect the two primary parties involved: the auditor and the audit client. While prior research has been limited to considering one side of a negotiation, we compare the judg- ments of both auditors and client management in the same negotiation setting. Since many contextual features of negotiations influence both parties, it is important to consider both of them to better understand how the negotiated outcome would be affected.

The potential consequences for failing to reach an agreement are asymmetric for audi- tors and their clients. For example, a failure to reach an agreement on an audit difference could ultimately lead to a modified audit opinion (e.g., qualified or adverse opinion). For the auditor, a modified opinion may lead to reduced audit/litigation risk, but may also strain a relationship or even, absent a strong audit committee (cf., Carcello and Neal 2003), result in loss of the client (Chow and Rice 1982; Chan, Lin, and Mo 2006). For the client, a modified opinion can negatively affect market returns (Taffler, Lu, and Kausar 2004), decrease market share (Loudder et al. 1992) and signal a decline in future earnings (Frost 1994). Accordingly, not reaching an agreement is, in general, potentially worse for

* Accepted by Alan Webb. We thank the participants for being generous with their time and expertise. We

acknowledge the helpful feedback from workshop participants at The University of Alabama, the University

of Nevada-Las Vegas, the 2013 AAA Audit Mid-year Meeting, the 2013 AAA Annual Meeting, and Lehigh

University. We also are appreciative of the assistance of Kelsey Brasel and Mary Kate Meehan, as well as

the helpful comments from Rich Houston, Linda Parsons, Gary Taylor, and Ken Trotman. We also thank

the two anonymous reviewers and the editor for many valuable comments and suggestions throughout the

review process.

Contemporary Accounting Research Vol. 32 No. 4 (Winter 2015) pp. 1507–1528 © CAAA

doi:10.1111/1911-3846.12121

the client than the auditor, leading to enhanced negotiation power for the auditor. General negotiation literature suggests that the more powerful negotiator will concede less during negotiations (e.g., Rubin and Brown 1975). In addition to less concessionary behavior, auditors may also exert their power in negotiations by involving the audit committee in the discussions or threatening a qualified opinion. However, auditors may be reluctant to use these tactics as they can have a negative impact on the auditor–client relationship. Overall, we expect that auditors will exhibit less concessionary judgments in the pre- negotiation stage (i.e., determining first offers, goals and limits) than CFOs will.

General negotiation literature suggests that deadline pressure influences a variety of negotiation variables including concessions and goal setting (cf., Druckman 1994). While deadline pressure is a common occurrence in most audits (DeZoort and Lord 1997), audi- tors’ and CFOs’ differing roles, strategies, and repercussions for nonagreement could lead to differential effects of deadline pressure. In general, the negotiation literature finds that increased time pressure creates greater concessions by negotiators (e.g., Pruitt and Johnson 1970; Smith, Pruitt, and Carnevale 1982), and that the negotiator with the larger negotia- tion limit relative to his/her respective initial offer (expected to be CFOs, Bame-Aldred and Kida 2007) will concede more with increased time pressure (Pruitt 1981).

We expect that auditors, as the more powerful negotiator, will be more influenced by deadline pressure than their clients. Our basis for this expectation, which seemingly runs counter to general negotiation findings, is founded in the different strategies that prior accounting research suggests these parties employ. Specifically, once the negotiation begins, auditors tend to concede very little (e.g., Hatfield, Houston, Stefaniak, and Usrey 2010), while their clients tend to approach negotiations with more flexibility (e.g., Bame- Aldred and Kida 2007). General negotiation literature examining strategies suggests the possibility that auditors will be susceptible to increased deadline pressure because of an inherent constraint when using a rigid approach: the time required to employ such a tac- tic. That is, literature finds that a rigid strategy requires sufficient time to allow the other party to “give in,” such that the ability to use a rigid strategy often diminishes as deadline pressure increases and time to “remain firm” decreases (Rubin and Brown 1975). To that end, in order to be considered an effective, “tough” negotiator, auditors need multiple interactions and time for their opponents to reconsider their position.

To examine this potential influence on auditor–client negotiations, we conduct an experiment in which both auditor and CFO participants are provided with information regarding an estimate that has been audited (i.e., the allowance for inventory obsoles- cence), resulting in a different estimate between client and auditor. The difference between the audit team’s and management’s estimates necessitates that the parties meet to discuss and agree on the estimate to be reported in the financial statements. Within the provided information, participants are given an audit scenario in which deadline pressure (high vs. low) is manipulated between participants. The dependent variables include participants’ judgments regarding their pre-negotiation position (i.e., their planned initial offers, negoti- ation goals, and limits). Pre-negotiation positions are amounts each party develops in anticipation of the negotiation (e.g., goal, limit, initial offer). This is different from behav- ior during negotiations. General negotiation research has found pre-negotiation positions to be influential on, and predictive of, final negotiation outcomes (e.g., Pruitt and Carne- vale 1993; Kristensen and G€arling 2000; Maaravi, Ganzach, and Pazy 2011; Gatzlaff and Liu 2013). We consider pre-negotiation concessionary behavior, measured by the extent to which participants move away from an initial position (the audit team estimate for audi- tors and the value in the unaudited financial statements for CFOs) in developing their expectations for the negotiation.

As predicted, we find that prior to starting a negotiation, auditors concede signifi- cantly less, in general, than CFOs on all pre-negotiation measures. Consistent with this

1508 Contemporary Accounting Research

CAR Vol. 32 No. 4 (Winter 2015)

result, we also find that auditors are more likely to use their power in a negotiation by planning the use of contentious (rigid) strategies such as remaining firm and suggesting that the earnings announcement be postponed. However, we find that CFOs and auditors react differently to end-of-engagement deadline pressure in preparing for negotiations. Spe- cifically, the auditors, not the CFOs, react to the heightened deadline pressure by conced- ing more on their initial negotiation positions under time pressure, while CFOs do not. Consistent with these findings, we find that auditors’ planned use of negotiation tactics change under deadline pressure (while CFOs’ do not). While auditors are generally more likely to use rigid tactics and assert their power, they become less likely to do so when under deadline pressure and when time is limited.

This study’s findings extend audit negotiation research in several ways. First, this study considers a prevalent characteristic of audits that general negotiation literature con- siders critical: deadline pressure. Second, most accounting negotiation research evaluates auditors’ or client management’s negotiation decisions. However, such one-sided consider- ation may limit the conclusions that can be drawn regarding how a variable may impact the negotiation process and/or negotiation outcomes. This study compares the judgments of both auditors and CFOs and finds each party uses different strategies in the same nego- tiation context. In general, auditors employ a more rigid negotiation tactic and concede less than client management does. However, when under deadline pressure at the end of an audit, the auditors’ strategy changes, and they react more to the pressure (conceding more) than client management does. Examining only one side of the negotiation would have provided an incomplete picture of the effect of deadline pressure as a variable in the overall negotiation outcome. Finally, while Hatfield et al. (2010) find that only 28 percent of their sample receives any formal negotiation-related training, our own anecdotal discus- sions with partners suggest that this type of training is somewhat generic and often related to the negotiation of fees. The current study provides information that may improve self- awareness during audit adjustment discussions, but also provides information on the behavior of their clients and the impact that timing of negotiations (if under deadline pres- sure or not) may have on each party. Consistent with Trotman, Wright, and Wright (2005), who find that consideration of the negotiator’s counterpart improves that negotia- tor’s own position and outcome, consideration of both sides of the negotiation table is key to effective training to help auditors perform better in such client interactions.

The remainder of the paper is organized with hypotheses development in section 2; research design in section 3; and results following in section 4. Finally, section 5 discusses findings and implications for audit research.

2. Hypothesis development

Auditor–client negotiations

Prior research acknowledges that financial statements are a product of auditor–client negotiations (Antle and Nalebuff 1991; Gibbins et al. 2001). The need for negotiations is attributable to differences between auditors and management regarding the interpre- tation of generally accepted accounting principles (e.g., revenue recognition), the amount or substance of disclosure content, and/or management’s estimates within the financial statements (e.g., allowance for doubtful accounts). Survey research provides a descriptive perspective on auditor–client negotiations that has helped develop an under- standing of the experiences and incentives affecting the negotiating parties (e.g., Gibbins et al. 2001; Gibbins, McCracken, and Salterio 2005; Gibbins et al. 2007). Further, a growing body of experimental research examines the auditor–client negotiation process. For example, prior research finds that outcomes and aspects of the negotiation process are influenced by factors such as engagement risk (Johnstone, Bedard, and Biggs 2002); audit committee effectiveness or existence of authoritative guidance (Ng and Tan 2003);

Deadline Pressure in Negotiations 1509

CAR Vol. 32 No. 4 (Winter 2015)

auditor experience (Brown and Johnstone 2009); relative magnitude and order of adjustments (Hatfield et al. 2010); and process variables such as altering the auditor’s strategy/approach to the negotiation process (Trotman et al. 2005; Sanchez, Agoglia, and Hatfield 2007; Hatfield, Agoglia, and Sanchez 2008; Tan and Trotman 2010).

Comparative cost of no agreement

Before issuing an unqualified opinion, auditors should resolve any disagreements with management regarding the financial statements and disclosures. If these issues are not resolved and the auditor believes that the financial statements or related disclosures are materially misstated, the auditor would be required to issue an opinion other than an unqualified opinion (i.e., a “modified” opinion such as a qualified or adverse opinion). While both parties may have incentives to resolve issues that arise in order to avoid a modified opinion, the result of the negotiation process itself has a different impact on each party. For the client, a modified opinion would likely have negative effects. For example, adverse stock prices and investor decisions have been found to be associated with qualified audit reports, particularly if the opinion was due to asset valuation issues (e.g., Firth 1978; Chow and Rice 1982; Loudder et al. 1992; Taffler et al. 2004; Ghicas, Papadaki, Siougle, and Sougiannis 2008). Additionally, creditors may consider qualified opinions when making lending decisions (e.g., Guiral-Contreras, Gonzalo-Ang- ulo, and Rodgers 2007), possibly because modified opinions often signal a decline in future earnings (Frost 1994). Raghunandan (1993) even found that companies with modified opinions are more likely to receive an adverse resolution of pending litigation than similar companies that receive unqualified (“clean”) opinions. In summary, modi- fied opinions can affect clients’ cost of capital, market capitalization, and in some cases their ability to continue as a going concern (Wilkins 1997). Thus, clients are incented to concede, or be willing to concede, what is necessary to avoid such consequences.

For auditors, an altered opinion will lower the auditor’s audit risk and lower potential litigation costs (Carcello and Palmrose 1994). While the auditor can reduce these potential costs by issuing a modified opinion, the auditor may also suffer adverse consequences. For example, prior accounting research, across several countries, provides empirical evidence of clients switching auditors after receiving modified opinions (Chow and Rice 1982; Len- nox 2000; Chan et al. 2006; Carey, Geiger, and O’Connell 2008), particularly in the absence of a strong audit committee (cf., Carcello and Neal 2003). Thus, in addition to their duty to the shareholders, auditors must weigh the positive impact of reduced risk (a firm-wide effect) against the heightened risk of client loss, especially if the client is a rela- tively important/large client. However, while the loss of a single client has the potential to influence auditors’ decisions (e.g., McKeown, Mutchler, and Hopwood 1991; Reynolds and Francis 2001), the loss of a single client is generally absorbable, particularly with lar- ger audit firms.

Concessionary behavior

In this study, we refer to pre-negotiation concessionary behavior as the determination of amounts, developed in anticipation of a negotiation, that differ (i.e., concede) from that party’s initial number. For the auditor, this initial number is the audit team estimate; for client management, this initial number is the amount in the unaudited financial statements. This type of concessionary behavior is different from concessions that occur during negoti- ations. Specifically, we look at each party’s decisions regarding their first offer, goal, and limit. General negotiation research has found these pre-negotiation positions to be highly important in predicting negotiated outcomes (e.g., Pruitt and Carnevale 1993; Kristensen and G€arling 2000; Shell 1999; Van Poucke and Buelens 2002) and continues to use these

1510 Contemporary Accounting Research

CAR Vol. 32 No. 4 (Winter 2015)

measures as predictors of negotiated outcomes (e.g., Maaravi et al. 2011; Gatzlaff and Liu 2013).

1 Generally this literature finds that a negotiator’s first offer is the most influential.

For example, Van Poucke and Buelens (2002) use stepwise regression to demonstrate that opening offers are most influential to the negotiated outcome. They also find that negotia- tors’ goals are important in predicting negotiation outcomes, while their limits have the least influence. This general finding is consistent with the findings in audit–client negotia- tion research. For example, Hatfield et al. (2010) find that first offer is the most important variable in determining a simulated negotiated outcome. Initial offer and goal are related in that they change during the negotiation such that negotiators’ offers and goals converge until they equal the negotiated outcome (in a successful negotiation). It is also important to note that the auditor’s negotiation limit should be based on audit risk and materiality and should not be influenced by negotiation variables, such as deadline pressure. So, while we concentrate on the first offer and goal, we believe it is important to consider how nego- tiators’ limits may also be impacted.

The discussion in the prior section suggests that failing to come to an agreed-upon amount, resulting in a modified opinion, has potentially more direct and immediate nega- tive consequences for audit clients than for auditors. However, to date, auditing research has not compared the pre-negotiation judgments of auditors and their clients. General negotiation literature demonstrates that the party negotiating from a position of power generally expects the other party to be more flexible (e.g., Hornstein 1965; Michener, Fle- ishman, Vaske, and Statza 1975). Further, in an auditing context, auditors may be limited in their ability to concede by regulatory constraints, as well as constraints due to PCAOB inspections or concurring partner reviews. The only current paper that compares auditors’ and management’s judgments on the same audit issue is Bame-Aldred and Kida (2007), which finds that auditors have smaller negotiation ranges than managers, though their study is not designed to consider the extent of participants’ pre-negotiation concessions. While prior research suggests that auditors may concede less during a negotiation, based perhaps on professionalism (Ng and Tan 2003), it is unclear from prior research whether auditors’ pre-negotiation positions will move more or less than those of their clients, in anticipation of the negotiation.

2 Based on the relative power of the two negotiation parties,

we expect that the relative movement of auditors from the audit team estimate will be less than client management’s movement from the estimate contained in the unaudited finan- cial statements, leading to the following hypothesis:

Hypothesis 1. When determining pre-negotiation positions, client management’s conces- sionary behavior will be greater than auditors’ concessionary behavior.

End-of-engagement pressure

Audit research has evaluated the impact of time pressures on the audit process. In a review of pressure effects in audit literature, DeZoort and Lord (1997) state (at the time of their litera- ture review) that time pressure was one of the most researched types of pressure in accounting literature. This is due to the pervasive nature of this pressure in auditing, which led to this issue receiving prominent attention (e.g., the Cohen Commission 1978; the National Commission on Fraudulent Financial Reporting 1987), and thus prompting significant academic research.

1. To clarify our nomenclature, the general negotiation literature labels these reference points as opening offer,

aspiration, and reservation price (first offer, goal, and limit, respectively).

2. For example, in a survey of auditors Gibbins et al. (2001) find that client management are more likely to

move off their initial position during a negotiation than are auditors. However, experimental research sug-

gests that auditors are certainly willing to concede (material amounts) when determining their initial posi-

tion (e.g., Hatfield et al. 2010).

Deadline Pressure in Negotiations 1511

CAR Vol. 32 No. 4 (Winter 2015)

Deadline pressures that auditors and clients face, especially in regard to completing negotia- tions at the end of the audit, are often due to filing deadlines imposed by third parties such as regulatory agencies. Such a context differs from many of the settings in general negotiation research in which one of the parties (or both) set a deadline for the negotiation process (e.g., purchasing a car). Further, an outside third party that could influence or set a deadline (e.g., regulatory agency) may be able to penalize one or both of the parties for missing the deadline (e.g., revoking security registration). When imposed, deadlines end the negotiation for both sides, suggesting that the time pressure brought on by the end of the audit is an overarching concern that may directly affect both the auditor and client management.

General negotiation literature has examined time pressure and considers it a prominent and influential characteristic in the negotiation context. According to the literature, as time pressure increases, the desire for each party to reach an agreement is enhanced (Pruitt 1981). Several studies find that deadline pressures influence the negotiation process and related out- comes (e.g., Pruitt and Johnson 1970; Smith et al. 1982). More specifically, Pruitt and John- son (1970) find that concessions between negotiators are greater when time pressures are high, compared to when time pressures are low. Experiments by Smith et al. (1982) provide similar findings regarding time pressure, finding that concession rates are greater under high, compared to low, deadline pressures. The generalz rationale for these findings is that dead- line pressure increases the importance (and salience) of reaching an agreement. That is, in general, negotiators’ offers are closer to the opposing party’s position when less time is avail- able to negotiate.

Differential effect of time deadline pressure

The development of Hypothesis 1 suggests that client management will generally concede more than auditors when developing their position for an ensuing negotiation. Audit research finds that auditors employ a rigid negotiation strategy by deciding on the financial number that they feel is “correct” and then moving very little from this number during negotiations (e.g., Ng and Tan 2003; Hatfield et al. 2010). Further, as stated previously, the differing impact of not reaching an agreement indicates that the balance of power leans toward the auditor. These prior studies indicate that client management may have a greater incentive to resolve a dispute and that as pressure to reach a solution becomes more salient, client management will be more likely to move toward the auditor’s position. Further, general negotiation literature also finds that the party with a higher limit (i.e., willing to move the furthest if necessary) will be influenced by time pressure the most (Pruitt 1981), indicating that client management may be the most influenced by time deadline pressure. However, Rubin and Brown (1975) suggest that while the more powerful negotiator (i.e., the auditor) is more likely to be dominant or “tough” in negotiations, they further state, “since toughness requires increased time, it is likely to diminish as time pressure increases” (122).

3 Consistent with this “time requirement,” Kelley

(1966) states that time pressure forces the negotiator to avoid early commitment to his/her position, decreases bluffing, and reduces the possibility of protracted interchanges, such that the parties cannot disclose/exchange information slowly.

Pruitt (1981) discusses the Flexible Rigidity Hypothesis, which describes how negotia- tors behave given differing orientations to a negotiation (problem solving vs. win/lose). Pruitt suggests that rigidity can enhance one’s negotiated outcomes, but such an orienta- tion slows down the negotiation process. Again, prior research has shown that auditors adopt a fairly rigid or nonconcessionary approach during auditor–client negotiations (Ng and Tan 2003; Hatfield et al. 2010). Pruitt further proposes that as time pressure increases, rigid negotiators will become more flexible, leading to greater concessions. It is important to note that the audit context differs from contexts considered in the general negotiation

3. This proposition is based on Rubin and Brown’s (1975) review of 28 negotiation studies.

1512 Contemporary Accounting Research

CAR Vol. 32 No. 4 (Winter 2015)

literature. For example, auditors have less available flexibility in auditor–client negotia- tions than “average” negotiators that have been considered in the general negotiation liter- ature (e.g., Rubin and Brown 1975; Pruitt 1981). That is, professional constraints such as accounting principles, auditing standards, partner reviews, and PCAOB inspections limit the extent to which auditors will alter their estimates. However, while auditors’ flexibility may be more limited than negotiators’ in the general literature, we expect that they still have some ability to alter their concessionary behavior, as well as the perceived need to concede more when deadline pressure limits their ability to take a tougher stance.

Based on the discussion above, client management will employ more flexible negotia- tion strategies than auditors and will not use a rigid strategy in pre-negotiation decisions. Therefore, if the client generally approaches these negotiations expecting to concede a sub- stantial amount, there is no reason for this expectation to change under added pressure, and thus no reason to change their pre-negotiation strategy or positions. While they too have incentives to concede more to ensure that an agreement is reached, the persistent pressures discussed in the development of Hypothesis 1 may have already pushed manage- ment to prepare for negotiations in such a way that planned concessions have little or no room to increase. Thus, there is no need for a strategic shift in how clients will approach and plan for negotiations with their auditor. Therefore, we expect the effect of deadline pressure to be greater for auditors than for client management. That is, auditors will increase concessions when under deadline pressure more than client management. This leads us to the following hypothesis:

Hypothesis 2. The increase in pre-negotiation concessionary behavior due to high end-of- engagement deadline pressure will be greater for auditors than for client management.

3. Research design

Task and procedure

Participants included both auditors (mostly partners and some managers) and financial executives (mostly CFOs) that serve the roles of audit partner and CFO in this study.

4

Data were gathered from 49 auditors and 51 corporate executives, resulting in a total of 100 responses used for hypothesis testing. A total of 2,074 cases were sent to potential participants (874 auditors and 1,200 executives), from which 116 responses were collected.

5

Considering returned cases due to inaccurate mailing addresses, the overall response rate was 5.60 percent, with 6.41 percent auditor response rate and 5.00 percent executive response rate. The mail-out was conducted without any prior professional relationship, contact, or prior agreement/interest in participating (i.e., a “cold” mail-out), resulting in a lower response rate than other studies where there was prior contact with potential participants and/or firm support in contacting/administering materials. Our response rate is similar to other recent studies surveying CFOs (e.g., “5–8 percent” in Graham and Harvey (2012, 1) and “5.4 per- cent” in Dichev, Graham, Harvey, and Rajgopal (2013, 4)).

6 When we include early versus

late responders as a variable in our ANOVA, it is not significant, it does not interact with

4. Given the difficulty of obtaining such participants, we obtained CFO data from an online repository of execu-

tive biographies. To ensure that data were collected in a similar manner, we purchased a listing of audit man-

agers and partners from a company that manages mailing lists for the AICPA. We selected a random sample

of CFOs and audit professionals from the listings and mailed experimental materials to selected persons.

5. Of the 116 auditors and executives that provided responses to the study, seven auditors and nine executives

were omitted from analysis due to incomplete data.

6. Additionally, these studies cite Brav, Graham, Harvey, and Michaely (2005), which compares a response rate of

approximately 67 percent of a captured sample from a conference (i.e., participants were obtained by administer-

ing the survey instrument in-person to financial executives at the beginning of a professional conference) to sur-

vey responses collected via mass electronic mail-out (approximately 8 percent) and find no response bias.

Deadline Pressure in Negotiations 1513

CAR Vol. 32 No. 4 (Winter 2015)

any other variables in any of our models, and it does not change the results or inferences of these models. CFOs (auditors) had an average of 19 (25) years of experience with the annual audit process (audit experience).

7 The instrument was a short case study (approximately seven

pages), which was mailed to participants (See Table 1 for participant demographics). Participants were provided with instructions and background information regarding

the auditor and audit client. Based on their current professional role (auditor or corporate

TABLE 1

Participant demographics

Panel A: Auditor participants’ demographics

Position

Partner Sr. Manager Manager Other Total

43 3 1 2 49 Gender

Male Female

47 2 Experience

Audit experience 25.3 years Years in current position 15.3 years

Self-rated experience resolving audit differences* 8.2

Firm size

Big 4 18 Regional 15 International 10 Local 0 National 5 Other 1

Panel B: Management participants’ demographics

Position

CEO CFO Controller Other Total 1 43 4 3 51

Gender

Male Female 47 4

Experience

Yes No

Licensed CPA? 42 9

Public accounting experience? 40 11 If “yes,” average experience: 5.9 years

Experience with audit 19.4 years

Years in current position 7.7 years Self-rated experience resolving audit differences* 8.3

Company information (all publicly held companies)

Average gross revenue $2.57 billion

Notes:

* All participants rated their own experience participating in the resolution of audit differences on a

scale from 1 (“no experience”) to 9 (“extensive experience”).

7. There were very few (eight) non-CFOs in the sample. Results are unchanged if these participants are removed.

1514 Contemporary Accounting Research

CAR Vol. 32 No. 4 (Winter 2015)

executive), participants were instructed to assume the role of an audit manager or CFO of the company throughout the case. Background information also included a brief synopsis of the audit client and the audit firm.

After reading the background information, participants were provided with a compar- ative balance sheet and income statement (current year unaudited and prior year audited). Participants then considered a situation that arose during the audit: the auditor’s estimate regarding the inventory obsolescence account balance was materially different from man- agement’s estimate. Participants viewed an e-mail from the audit manager to the CFO that summarized the issue, including both management’s and the audit team’s estimates (see Exhibit A for a copy of the e-mail). The e-mail indicated that there would be a meeting to discuss the matter and that both parties knew the other’s initial account balance estimate. For the audit client, the initial account balance estimate was the amount of the allowance for obsolete inventory recorded in the unaudited financial statements. For the auditor, the initial estimate was the audit team’s independent estimate of the allowance.

Participants then responded to a series of questions regarding their plans for the upcoming negotiation. These questions included the amount of the auditor (CFO) partici- pant’s (1) goal for the estimate, (2) minimum (maximum) amount he/she would accept, (3) anticipated goals and maximum (minimum) amounts of the opposing party, and (4)

Exhibit A

E-mail Provided to Participants Describing Audit Issue to be Discussed

To: CFO, Wareham Electronics

From: Audit Manager, Williams & Kent, LLP

_______________________________

We have audited the significant estimates included in the 2011 financial statements. During our

testing, we found one discrepancy between our estimates and management’s. This discrepancy

involves the estimate for the allowance for obsolete inventory.

Based on our understanding of the relevant information and our discussions with key Wareham

personnel, just prior to the end of 2011, one of Wareham’s competitors introduced a product line

that seems technologically superior to, and less expensive than, similar products currently in

Wareham’s inventory. The competitor’s new product is likely to reduce the demand and sales prices

for similar products currently in Wareham’s inventory.

We also understand that it is likely that some of this inventory may be sold at lower prices

(potentially below cost), and that some of this inventory may never be sold. Based on the Sales

Team’s most current assessment of product sales, Wareham has decided that an inventory

obsolescence allowance of $9,000,000 is appropriate for the 12/31 financial statements. Accordingly,

Wareham increased the balance in the allowance for obsolete inventory from $7,500,000 to

$9,000,000.

Although our audit team believes that Wareham’s estimate for the allowance for obsolete inventory

was made in good faith, our audit team considered the same evidence and developed an independent

estimate. Based on this information, we believe that the allowance for obsolete inventory should be

increased to $14,000,000, as of 12/31/2011.

Therefore, our audit team proposes the following adjusting entry:

Dr. Cost of sales $5,000,000

Cr. Allowance for obsolete inventory $5,000,000

I am available to meet at your convenience.

Deadline Pressure in Negotiations 1515

CAR Vol. 32 No. 4 (Winter 2015)

planned initial offer in the negotiation. Next, participants answered questions designed to determine how likely they would be to use specific contentious negotiation tactics during the negotiation. The tactics included remaining firm with initial estimate, suggesting that the audit committee be involved in discussions, suggesting that earnings announcement be postponed, and verbally stating the possibility of terminating the relationship. These tac- tics were considered as they are specific forms of the more general contentious strategies that negotiators in audit–client negotiation contexts might use during negotiations.

8 Partic-

ipants responded to these questions using a Likert scale from “1=Very Unlikely” to “9=Very Likely.” Finally, participants answered manipulation check questions and provided demographic information.

Independent variables

The research design is a 2 9 2 between-subjects design (Profession 9 Deadline pressure). Participants were assigned to either the auditor or the CFO profession in the negotiation based on their current professional position.

9 Deadline pressure (high vs. low) was manip-

ulated within the case materials by informing participants that there was fewer than two days (more than two weeks) left in audit fieldwork and the earnings release for the high (low) conditions.

10 Using a manipulation check question that asked participants,

“How much time did you feel was available before a decision had to be reached on the inventory valuation issue?” (where 1 = Very Little Time and 9 = Plenty of Time on a 9- point Likert scale), we find that participants under high deadline pressure perceived less time than did low pressure participants (p-value < 0.001).

Dependent variables

To compare auditors with audit clients, it is necessary to look at the level of concession from their respective starting estimates to arrive at their pre-negotiation positions (first offer, goal, and limit). First Offer represents the amount participants would propose as discussions first start; Goal represents the amount the participant hopes to convince the other party to accept; and Limit represents the minimum (maximum) that auditor (CFO) participants would accept for the final balance. For auditors, the concession represents the extent to which these measures are less than the audit team’s initial estimate ($14 million). For CFOs, concession represents the extent to which these measures are more than the amount in the unaudited financial statements ($9 million). To be clear, the concessionary judgments we measure are not concessions within a negotiation, but rather “pre-negotia- tion” concessionary behavior; this provides a strong indication of an ultimate negotiation outcome (e.g., Hatfield et al. 2010).

8. These tactics have been considered by prior research. Remaining firm and suggesting relationship termina-

tion have been specifically examined in prior audit research (e.g., Bame-Aldred and Kida 2007; Gibbins,

McCracken, and Salterio 2010) as has involving the audit committee (e.g., Ng and Tan 2003). Missing the

deadline is a specific version of “breakoff” (Pruitt 1981), which is an effective strategy when the absence of

agreement impacts one party more than the other, which is suggested in the development of H1.

9. Use of such a measured variable increases potential issues of correlated omitted variables (e.g., Libby,

Bloomfield, and Nelson 2002). Our results are robust to the inclusion of all demographics measured, includ-

ing negotiation experience, experience with audit, years in current position, and gender.

10. The length of time manipulated for the end-of-engagement deadline pressure (two weeks vs. two days) was

determined after considering the findings of Gibbins et al. (2001) and discussions with former auditors.

Additionally, five different audit partners were asked specifically about the realism of two days to discuss

an adjustment. The consensus is summed up by one partner’s statement: “I seem to frequently find that we

are doing testing right up to the last minute, and there are occasions where our testing uncovers material

errors.” These partners also indicated that these late breaking proposed adjustments can create difficult dis-

cussions with the client.

1516 Contemporary Accounting Research

CAR Vol. 32 No. 4 (Winter 2015)

Specifically, to measure the auditors’ concessionary behavior for the first offer (OFFER), we take $14 million minus the participants’ reported planned first offer. For example, if an auditor’s planned initial offer is “$13 million” then OFFER equals $1 mil- lion, which represents the extent to which the auditor conceded from the audit team esti- mate. Likewise, to measure CFOs’ concessionary behavior for the first offer, we take the participants’ reported first offer minus $9 million. Thus, if a CFO’s planned initial offer were $11 million, then OFFER equals $2 million. We calculate concessions for GOAL and LIMIT using the same approach.

Additionally, we create a measure of the participants’ percentage concession for the first offer (%OFFER, see Table 2). This indicates how much the participant conceded for their first offer as a percentage of their “room to move,” defined by their own negotiation range ($14 million minus LIMIT for auditors; and LIMIT minus $9 million for CFOs). Such a measure not only indicates the level of concession, but also provides a relative rate of concession at the onset of the negotiation. We create a similar variable for goals (%GOAL, see Table 3). All of these measures indicate the respective concessionary behav- ior of each participant in anticipation of a negotiation.

11 Thus, the measures are compara-

ble between auditor and CFO participants.

4. Data analysis and results

Concessions of auditors versus CFOs (H1)

H1 predicts when determining pre-negotiation positions, client management’s concessions will be greater than auditors’ concessions. Consistent with H1, results for OFFER show that Profession is highly significant (F-statistic = 7.76, p-value = 0.003; Table 2, panel B).

12 Specifically, when determining their initial offer during pre-negotiation planning,

CFOs conceded, on average, $784,314 from the unaudited financial statement number while auditors conceded, on average, $183,673 from the audit team estimate (see Table 2, panel A). Similarly, results for %OFFER also demonstrate a significant effect for Profes- sion (F-statistic = 7.61, p-value = 0.004; nontabulated) where CFOs averaged a concession of 26.59 percent of their own proposed range with their first offer while auditors conceded, on average, only 8.33 percent (see Table 2, panel D).

Results are similar for GOAL where the mean concession for CFOs was $1,174,510, while auditors conceded $341,837 on average (F-statistic = 12.84, p-value < 0.001; see Table 3, panel B). Similarly, the %GOAL data in Table 3, panel D, indicates that CFOs’ concessions for goals were a greater percentage of their negotiation range (mean of 46.42 percent) compared to auditors’ (mean of 17.85 percent; F-statistic = 14.02, p-value < 0.001; nontabulated). Finally, the means for LIMIT indicate that CFOs were willing to concede more than auditors before breaking off negotiations (means of $2,459,369 and $1,677,551, respectively; F-statistic = 6.34, p-value = 0.007; see Table 4, panel B).13,14 Our results sug- gest, in general, that CFOs concede more than auditors in their pre-negotiation positions.

11. The sample size is reduced by 20 participants for this analysis, as these participants had zero concession

for their limit, and thus a negotiation range of zero (i.e., zero in denominator of calculation). This reduc-

tion of data works against our prediction if we assume a range of zero is indicative of no concessionary

behavior. Adding these participants in (with a value of zero) increases significance levels.

12. All p-values for directional tests are one-tailed.

13. Additionally, Chi-square tests indicate that CFOs made more material concessions than did auditors for

both GOAL and LIMIT, but not OFFER (using Financial Statement Materiality of $2,750,000, as defined

as 5 percent of net income before taxes, as a quantified materiality threshold). If we use Tolerable

Misstatement as a threshold (i.e., 50 percent of Financial Statement Materiality), CFOs’ concessions for

OFFER are also more material than auditors’.

14. Given that normality tests indicate our data are not normally distributed, we also ran nonparametric tests

for these analyses. The p-values for Wilcoxon Rank-Sums tests are 0.004, 0.001, and 0.013 for OFFER,

GOAL, and LIMIT, respectively (see panel B in Tables 2, 3, and 4, respectively).

Deadline Pressure in Negotiations 1517

CAR Vol. 32 No. 4 (Winter 2015)

TABLE 2

Analyses for initial OFFER concessions

Panel A: Means (SD) [n] for OFFER concessions

Professional Role

Deadline Pressure Auditor CFO Total

Low $0 $900,000 $459,184 (0) (1,561,249) [24] [25]

High $360,000 $673,077 $519,608 (810,349) (1,256,521)

[25] [26]

Total $183,673 $784,314

Panel B: ANOVA results for OFFER concessions*

df F-statistic p-value

Wilcoxon Rank-sums

p-value

Deadline Pressure 1 0.09 0.761 0.172 Professional Role 1 7.76 0.003

‡ 0.004 (H1)

Deadline Pressure 9 Professional Role 1 1.82 0.181 n/a

Panel C: Results of planned contrasts

df t-statistic p-value

Wilcoxon Rank-sums p-value

CFO High 6¼ CFO Low 1 0.57 0.569 0.388 (H2) Auditor High > Auditor Low 1 2.17 0.017

‡ 0.012 (H2)

(Auditor High – Auditor Low) > (CFO High – CFO Low) 1 1.35 0.090‡ n/a (H2)

Panel D: Means for %OFFER †

Deadline Pressure

Professional Role

Auditor (%) CFO (%)

Low 0.00 32.00 High 14.39 21.66 Total 8.33 26.59

Notes:

Independent variables:

Deadline Pressure was manipulated (high vs. low) by informing participants that there was less than

two days (more than two weeks) left in audit fieldwork and the earnings release for the high

(low) conditions.

Professional Role was assigned to the participant, based on their current professional position

(auditor or CFO).

* Model p-value is 0.027. † %OFFER is the participant’s concession for the Initial Offer as a percentage of their negotiation

range, which is $14 million minus LIMIT for auditors and LIMIT minus $9 million for CFOs.

See Table 4 for reported means and analysis of LIMIT. ‡ Directional prediction p-values are based on one-tailed tests.

1518 Contemporary Accounting Research

CAR Vol. 32 No. 4 (Winter 2015)

TABLE 3

Analysis for GOAL concessions

Panel A: Means (SD) [n] for GOAL concessions

Deadline Pressure

Professional Role

TotalAuditor CFO

Low $93,750 $1,340,000 $729,592 (367,220) (1,730,366)

[24] [25]

High $580,000 $1,015,384 $801,961 (862,167) (1,253,057)

[25] [26]

Total $341,837 $1,174,510

Panel B: ANOVA Results for GOAL concessions*

df F-statistic p-value

Wilcoxon Rank-sums p-value

Deadline Pressure 1 0.12 0.731 0.094

Professional Role 1 12.84 < 0.001‡ 0.001 (H1) Deadline Pressure 9 Professional Role 1 2.99 0.087 n/a

Panel C: Results of planned contrasts

Wilcoxon

df t-statistic p-value Rank-sums p-value

CFO High 6¼ CFO Low 1 0.77 0.440 0.436 (H2) Auditor High > Auditor Low 1 2.55 0.007

‡ 0.010 (H2)

(Auditor High – Auditor Low) > (CFO High – CFO Low) 1 1.73 0.044‡ n/a (H2)

Panel D: Means for % GOAL †

Deadline Pressure

Professional Role

Auditor (%) CFO (%)

Low 8.33 52.07

High 24.77 41.28 Total 17.85 46.42

Notes:

Independent variables are defined in Table 2.

* Model p-value is 0.002. † %GOAL is the participant’s concession for GOAL as a percentage of their negotiation range,

which is $14 million minus LIMIT for auditors and LIMIT minus $9 million for CFOs. See

Table 4 for reported means and analysis of LIMIT. ‡ Directional prediction p-values are based on one-tailed tests.

Deadline Pressure in Negotiations 1519

CAR Vol. 32 No. 4 (Winter 2015)

Consistent with these pre-negotiation position findings, we find that the planned negotiation tactics selected by auditors are different from those of the CFOs. Auditors, in general, are more likely to remain firm during negotiations (p-value = 0.093), involve the audit committee (p-value < 0.001), suggest postponing the announcement (p- value < 0.001), and suggest terminating relationship (p-value = 0.036) (see Table 5, panel B). Since the auditor could use different strategies or a combination of strategies, an “overall measure” (the sum of these four contentious tactics) was created to further dem- onstrate how auditors approach these negotiations with greater planned use of these tac- tics (p-value < 0.001; nontabulated). In general, these results suggest that auditors are willing to use their position of power and to employ more contentious tactics than are CFOs, who appear more flexible in their planned negotiation strategy.

TABLE 4

Analyses for LIMIT concessions

Panel A: Means (SD) [n] for LIMIT concessions

Deadline Pressure

Professional Role

TotalAuditor CFO

Low $1,279,167 $2,436,000 $1,869,388 (1,267,736) (1,908,943)

[24] [25]

High $2,060,000 $2,481,838 $2,275,055 (1,285,496) (1,693,664)

[25] [26]

Total $1,677,551 $2,459,369

Panel B: ANOVA Results for LIMIT concessions*

Wilcoxon

df F-statistic p-value Rank-sums p-value

Deadline Pressure 1 1.74 0.190 0.062

Professional Role 1 6.34 0.007 †

0.013 (H1) Deadline Pressure 9 Professional Role 1 1.37 0.244 n/a

Panel C: Results of planned contrasts

Wilcoxon

df t-statistic p-value Rank-sums p-value

CFO High 6¼CFO Low 1 0.10 0.928 0.439 (H2) Auditor High > Auditor Low 1 2.14 0.019

† 0.016 (H2)

(Auditor High – Auditor Low) >(CFO High – CFO Low) 1 1.17 0.122† n/a (H2)

Notes:

Independent variables are defined in Table 2.

* Model p-value is 0.030. † Directional prediction p-values are based on one-tailed tests.

1520 Contemporary Accounting Research

CAR Vol. 32 No. 4 (Winter 2015)

TABLE 5

Planned use of contending strategies

Panel A: Means for potential contending strategies*

Professional Role

Deadline Pressure Auditor CFO

Low Remain firm 7.5 6.0 Involve AC 6.8 3.7 Postpone announcement 6.1 2.4

Terminate relationship 2.6 1.5

High Remain firm 6.2 6.5

Involve AC 5.7 4.2 Postpone announcement 5.6 2.8 Terminate relationship 2.0 1.9

Total Remain firm 6.8 6.3 Involve AC 6.2 3.9

Postpone announcement 5.8 2.6 Terminate relationship 2.3 1.7

Panel B: Planned contrast results

Main effect †

Planned contrast ‡

t-statistic p-value t-statistic p-value §

Remain firm 1.33 0.093 1.89 0.031 Suggest involving audit committee 4.24 < 0.001 2.47 0.072 Suggest postponing announcement 5.99 < 0.001 0.88 0.191 Suggest terminating relationship 1.82 0.036 1.58 0.058

Panel C: Simple effect of deadline pressure on planned strategy use

Auditors CFOs

t-statistic p-value §

t-statistic p-value

Remain firm 2.19 0.017 0.74 0.467 Suggest involving audit committee 1.42 0.081 0.70 0.489 Suggest postponing announcement 0.63 0.532 0.61 0.544 Suggest terminating relationship 1.17 0.125 1.06 0.292

Notes:

Independent variables are defined in Table 2.

* Participants are asked if they would remain firm with their initial position on a 9-point scale from

“1-Very Unlikely” to “9-Very Likely”. Similarly, with the same scale participants were asked if

they would suggest involving the audit committee, postponing the announcement date, or

terminating the relationship during discussions regarding the disposition of the audit difference. † Main effect test considers the directional test of: (Auditor High + Auditor Low) > (CFO High +

CFO Low). ‡ Planned contrast considers the directional test of: (Auditor High�Auditor Low) > (CFO High�

CFO Low). § Planned contrasts are one-tailed tests.

Deadline Pressure in Negotiations 1521

CAR Vol. 32 No. 4 (Winter 2015)

The differential effect of deadline pressure (H2)

Hypothesis 2 states that the increase in concessions due to high end-of-engagement deadline pressure will be greater for auditors than for client management. To test this expectation, we consider the contrast that examines the increase in auditor concession due to deadline pressure, relative to that of CFOs and the simple effects of time on auditors and CFOs. Specifically, we test the following contrast: (Auditor High Deadline Pressure − Auditor Low Deadline Pressure) > (CFO High Deadline Pressure − CFO Low Deadline Pressure). When considering this directional contrast for OFFER, results are marginally significant in the expected direction (t = 1.35, p-value = 0.090; see Table 2, panel C). Also consistent with H2, planned simple effect tests for OFFER show that audi- tors conceded significantly more under deadline pressure ($0 vs. $360,000; p- value = 0.017), while CFO concessions did not change significantly ($900,000 vs. $673,000; p-value = 0.569).15 Results are stronger for the planned contrast when we look at % OFFER (t = 1.74, p-value = 0.043; nontabulated). That is, auditors increase from conced- ing 0.00 percent with their first offer to 14.39 percent (simple effect; p-value = 0.026; non- tabulated) when time pressure is high, while CFO’s concessions are not statistically different under high time pressure (32.00 percent vs. 21.66 percent; p-value = 0.322; nonta- bulated). Overall, and consistent with H2, our analyses provide evidence that auditors were affected by deadline pressure, while CFOs were not.

16

We also run this planned interaction contrast for GOAL (t = 1.73, p-value = 0.044; see Table 3, panel C) and %GOAL (t = 1.69, p-value = 0.046; nontabulated). Again, sim- ple effect tests indicate that auditors’ goals were significantly reduced by deadline pressure (t = 2.55, p-value = 0.007) and that CFOs’ concessions for goals were not significantly affected (p-value = 0.440; see Table 3, panel C). For LIMIT the contrast was not signifi- cant (p-value = 0.122; see Table 4, panel C), but planned simple effects were consistent with the idea that auditors were affected by time pressure (t = 2.14, p-value = 0.019) and CFOs were not (p-value = 0.928; see Table 4, panel C). Overall, these planned contrasts and simple effects provide support for the expectation that auditors will be more affected by deadline pressure when deciding on their negotiation positions and aspirations.

Recall, consistent with H1, we found auditors were more likely to plan to use contentious tactics during negotiations with their client. A primary rationale in the development of H2 is that such strategies require time (Rubin and Brown 1975). Thus, we expect that auditors’ consideration of these strategies will diminish under high deadline pressure more than CFOs’. By means of the same planned contrast used to test H2, we find that the planned use of these strategies decreases for auditors more than CFOs (“remaining firm” (t = 1.89; p-value = 0.031), “suggesting involving the audit committee” (t = 2.47; p-value = 0.072), and “suggesting the relationship be terminated” (t = 1.58; p-value = 0.058; see Table 5, panel B). Further, using this contrast for the combined measure of all four tactics suggests that, overall, auditors are more likely than CFOs to change tactics (t = 2.31; p-value = 0.011; nontabulated). Looking at planned simple effect tests for auditors, we find they are less likely to consider “remaining firm” (t = 2.19; p-value = 0.017) or “suggesting involving the audit committee” (t = 1.42; p-value = 0.081) when under high deadline pressure compared to low deadline pres-

15. Nonparametric tests for these simple effects also demonstrate a significant concession by auditors

(p-value = 0.012; Table 2, panel C) but a nonsignificant concession for CFOs (p-value = 0.388; Table 2, panel C). We use rank transformation to test the interaction nonparametrically and get a similar p-value

(0.083; nontabulated). Inferences for GOAL and LIMIT are also unchanged when using nonparametric tests.

16. We also look at whether or not participants conceded any amount. Thus, any concession was scored as 1,

while no concession was scored as 0. Categorical analysis of this dependent measure results in a significant

interaction of Professional Role and Deadline Pressure (p-value < 0.001; nontabulated). That is, when under high deadline pressure, 20 (31) percent of auditors (CFOs) conceded on their first offer, compared

to 0 (32) percent under low deadline pressure.

1522 Contemporary Accounting Research

CAR Vol. 32 No. 4 (Winter 2015)

sure (see Table 5, panel C). Additionally, for the combined measure, the simple effect of time pressure on auditors is significant (t = 1.84; p-value = 0.037; nontabulated). However, for CFOs, the change in the use of all of these strategies is not significant (see Table 5, panel C). On the whole, these results are consistent with our expectations and complement our findings in testing H2, suggesting that auditors’ pre-negotiation concessions are more affected by high deadline pressure than CFOs’ pre-negotiation concessions due to the influence on each party’s planned use of negotiation strategies.

Additional analysis

For comparability purposes, we perform analyses similar to Bame-Aldred and Kida (2007) to examine the size of the participants’ solution sets (the difference between the stated goal and limit). The solution set indicates the participants’ range of possible negotiated out- comes.

17 There are some key differences to consider while drawing inferences from this

comparison. First, Bame-Aldred and Kida employ a revenue recognition problem with six discrete solutions. These six solutions create clear earnings thresholds with direct repercus- sions on client management bonuses. These are very realistic contextual characteristics that would likely influence the negotiating parties in both determining their own solution set as well as predicting the solution set of the other. However, our setting has a more continu- ous range of solutions without incentives for particular numbers within that range. Sec-

TABLE 6

Analyses for solutions sets (GOAL�LIMIT)

Panel A: Means (SD) (n) for solution set

Deadline Pressure

Professional Role

TotalAuditor CFO

Low $1,185,417 $1,096,000 $1,139,796 (1,288,703) (1,785,702)

(24) (25)

High $1,480,000 $1,466,454 $1,473,094 (962,635) (1,409,593)

(25) (26)

Total $1,335,714 $1,284,859

Panel B: ANOVA Results for solution sets*

df F-statistic p-value

Deadline Pressure 1 1.42 0.236

Professional Role 1 0.03 0.854 Deadline Pressure 9 Professional Role 1 0.02 0.892

Notes:

Independent variables are defined in Table 2.

* Model p-value is 0.757.

17. In a negotiation, each party has in mind a “goal” (i.e., what that person is aiming to leave the negotiation

with) and a “limit” (i.e., the most that person is willing to compromise) for the negotiated outcome. These

pre-negotiation “solution sets” provide insight as to how willing each person is to negotiate (i.e., how

much room there is to negotiate) when the negotiation process begins.

Deadline Pressure in Negotiations 1523

CAR Vol. 32 No. 4 (Winter 2015)

ondly, Bame-Aldred and Kida do not have a manipulation and do not consider the extent of concessionary behavior by each party (i.e., no specific endpoints); rather, they focus on the size of solutions sets. These differences allow for some interesting comparisons that shed further light on how differences between auditors and their clients may depend on contextual characteristics (such as the differences noted between these two studies).

Bame-Aldred and Kida (2007) find that CFOs’ solution sets were statistically larger than auditors’ solutions sets, representing a greater flexibility by CFOs. We find no differ- ence between auditors and CFOs with regard to the size of their solution sets (means of $1,335,714 and $1,284,859, respectively; p-value = 0.923; see Table 6). Bame-Aldred and Kida also find that CFOs are better able to predict the solution sets of auditors than vice- versa. In the current study, CFOs’ predicted solution set for auditors is $1,968,878, while auditors’ predicted solution set for CFOs is $1,815,957 (nontabulated). Comparing these predicted solution sets to those in Table 6, panel A ($1,335,714 and $1,284,859 for audi- tors and CFOs, respectively), we see that CFOs are not more accurate at predicting the other party’s solution set than are auditors (p-value = 0.650; nontabulated).18 However, using nonparametric tests, we do find that deadline pressure influenced the auditors’ and CFOs’ solution sets ($1,139,796 and $1,473,094, respectively; Z = 2.263; p-value = 0.0237; nontabulated) in that solution sets were greater when deadline pressure was high. We did not find an interaction of deadline pressure and role on the solution sets of participants.

Given the differences in data collection and experimental case, one needs to be careful about drawing inferences from these differences between the two studies. It is interesting, however, in a setting where incentives and outcomes were more transparent (i.e., Bame- Aldred and Kida 2007), auditors had a much more narrow solution set than CFOs, and CFOs were better than auditors in anticipating the other party’s negotiation position. Yet, in our study where incentives and outcomes are less explicit and the audit issue more vague (e.g., financial statement estimate), auditors and CFOs gave themselves a similar amount of room to move from their initial position during the negotiation, and their solu- tion sets widened under high deadline pressure. This suggests that auditors’ and CFOs’ solution sets vary depending on the context (e.g., the transparency of incentives and out- comes), as well as with pressures (e.g., deadline pressure). In addition, CFOs in our study were not better at anticipating the auditor’s negotiation preferences, suggesting this negoti- ation advantage identified in prior research may depend on the negotiation context.

5. Concluding remarks

We evaluate the differential effects that end-of-engagement deadline pressure has on both auditors’ and clients’ concessions during the determination of pre-negotiation positions. One of our primary contributions to the negotiation literature is that this study evaluates both sides of the auditor–client negotiation process. Through direct comparison of audi- tors’ and CFOs’ pre-negotiation concessions within the same negotiation context, we can determine if auditors’ use of a more rigid strategy results in pre-negotiation concessions that are less than those of CFOs’ (H1). However, while we find that auditors in general concede less in their pre-negotiation positions than CFOs do, auditors’ pre-negotiation concessions are more influenced by high deadline pressure than CFOs’. Specifically, audi- tors concede more under high deadline pressure than when the pressure is not present, while CFOs’ concessions were not significantly affected by deadline pressure (H2). Negoti- ation theory suggests that the effect of deadline pressure is influenced by one’s own negoti- ation strategy. Auditors’ overall strategy of being more contentious (i.e., remaining firm)

18. Using nonparametric tests, we did not find any difference between the auditors’ and CFOs’ solution sets

(Z = �1.211; p-value = 0.226, nontabulated) or between the accuracy of auditors’ and CFO’s predicted solution sets for the other party (Z = 0.706; p-value = 0.480, nontabulated).

1524 Contemporary Accounting Research

CAR Vol. 32 No. 4 (Winter 2015)

and using their position of power requires time, which is demonstrated by auditor partici- pants changing their planned strategy in the high deadline pressure condition.

These results indicate how beneficial it is when examining auditor–client negotiations to consider both sides of the audit negotiation, especially when certain factors/pressures are present for both parties. For example, if this study had followed the research design of most prior accounting negotiation research and only evaluated how CFOs’ concessions varied under different deadline pressure (high vs. low), then a possible conclusion would be that the end of the audit deadline does not impact auditor–client negotiations. There- fore, in designing future experiments in auditor–client negotiation research, researchers may want to consider whether an evaluation of both sides of the negotiation process could augment their findings and perhaps shed additional light on the research question more comprehensively. It should be noted that development of a relative dependent variable can be difficult and carries with it its own potential limitations. Further, such research ques- tions necessitate extensive use of a valuable (and difficult to obtain) resource: partner/ CFO participants.

We also contribute to accounting and audit research by considering a pressure that is both ubiquitous in the typical audit environment and is consistently viewed as a primary consideration in general negotiation literature: deadline pressure. Clearly, the general negotiation literature suggests that deadline pressure will impact auditor–client negotia- tions and, thus, the financial statement numbers. However, it is important to look at how the unique auditor–client negotiation context may influence this effect. Results indicate that auditors’ negotiation positions become less conservative when the negotiation takes place toward the end of the audit engagement, compared to earlier in the audit. Given that many such issues are resolved at the end of the audit (e.g., Gibbins et al. 2007), our results suggest that audit quality may be regularly influenced by the timing of these discus- sions. Further, audit clients could potentially find ways to delay discussions to take advan- tage of the reduced leverage this affords the auditor.

Inferences from our analyses should be made in light of certain limitations. First, given the method of data collection, our response rate is somewhat low. As stated, these low rates are expected for these participant pools, and we perform the necessary analysis to consider nonresponse bias. Additionally, we consider pre-negotiation measures rather than actual negotiated outcomes and must rely on the correlation of these measures pro- vided by previous literature. It would be a valuable contribution to the literature if researchers could start to develop designs resulting in negotiated outcomes (e.g., Trotman et al. 2005). Finally, studies such as ours are unable to replicate all the incentives that cli- ents and auditors face when resolving issues such as these. More likely, our negotiation setting allows our participants to activate some form of these incentives as they respond to the experimental case.

Discussions with auditors during this study’s development indicate that many auditors do not believe they “negotiate” over proposed adjustments; rather, they claim to determine the “correct number” and insist it be posted. This is consistent with Hatfield et al.’s (2010) finding that 76 percent of the auditors in their sample never deviated from their initial offer during negotiations with a computer-simulated client. However, regardless of this belief, research indicates that auditors’ pre-negotiation positions, which likely affect the negotiated outcome, are affected by contextual features of the audit adjustment in predict- able ways (e.g., size/order of adjustments, authoritative guidance, deadline pressure, etc.). Hatfield et al. (2010) also indicate that only 28 percent of partners receive any formal negotiation training. While anecdotal evidence suggests that this type of training is on the rise, it is often general in nature and often related to audit fees. This study indicates how a common contextual factor during negotiations, such as a deadline, may differentially affect the negotiation behavior of both parties. Such information is key to effective train-

Deadline Pressure in Negotiations 1525

CAR Vol. 32 No. 4 (Winter 2015)

ing, and research shows that consideration of your negotiation counterpart can improve one’s own position and outcome in the negotiation (Trotman et al. 2005). That is, it is important for auditors to not only know how a factor such as deadline pressure may affect themselves, but also how it may affect their counterparts.

References

Antle, R., and B. Nalebuff. 1991. Conservatism and auditor-client negotiations. Journal of Account-

ing Research 29 (Supplement): 31–54. Bame-Aldred, C. W., and T. Kida. 2007. A comparison of auditor and client negotiation decisions.

Accounting Organizations and Society 32 (6): 497–512. Brav, A., J. R. Graham, C. R. Harvey, and R. Michaely. 2005. Payout policy in the 21st century.

Journal of Financial Economics 77 (3): 483–529. Brown, H. L., and K. Johnstone. 2009. Resolving disputed financial reporting issues: Effects of audi-

tor negotiation experience and engagement risk on negotiation process and outcome. Auditing:

A Journal of Practice & Theory 28 (2): 65–92. Brown, H. L., and A. M. Wright. 2008. Negotiation research in auditing. Accounting Horizons 22

(1): 91–109. Carcello, J. V., and T. L. Neal. 2003. Audit committee characteristics and auditor dismissals follow-

ing “New” going-concern reports. The Accounting Review 78 (1): 95–117. Carcello, J. V., and Z.-V. Palmrose. 1994. Auditor litigation and modified reporting on bankrupt

clients. Journal of Accounting Research 32 (Supplement 3): 1–30. Carey, P. J., M. A. Geiger, and B. T. O’Connell. 2008. Cost associated with going-concern-modified

audit opinions: An analysis of the Australian audit market. Abacus 44 (1): 61–81. Chan, K., K. Lin, and P. Mo. 2006. A political-economic analysis of auditor reporting and auditor

switches. Review of Accounting Studies 11 (1): 21–48. Chow, C. W., and S. J. Rice. 1982. Qualified audit opinions and share prices – An investigation.

Auditing: A Journal of Practice & Theory Winter 1 (2): 35–53. Cohen Commission. 1978. The Commission on Auditors’ Responsibilities: Report, Conclusions, and

Recommendations. New York, NY: AICPA.

DeZoort, F. T., and A. T. Lord. 1997. A review and synthesis of pressure effects research in

accounting. Journal of Accounting Literature 16 (1): 28–85. Dichev, I. D., J. Graham, C. R. Harvey, and S. Rajgopal. 2013. Earnings quality: Evidence from the

field. Journal of Accounting and Economics 56 (2–3): 1–33. Druckman, D. 1994. Determinants of compromising behavior in negotiation: A meta-analysis. Jour-

nal of Conflict Resolution 38 (3): 507–55. Firth, M. 1978. Qualified audit reports: Their impact on investment decisions. The Accounting

Review 53 (3): 642–50. Frost, C. A. 1994. Uncertainty-modified audit reports and future earnings. Auditing: A Journal of

Practice & Theory 13 (1): 22–43. Gatzlaff, D., and P. Liu. 2013. List price information in the negotiation of commercial real estate

transactions: Is silence golden? Journal Of Real Estate Finance & Economics 47 (4): 760–86. Ghicas, D., A. Papadaki, G. Siougle, and T. Sougiannis. 2008. The relevance of quantifiable audit

qualifications in the valuation of IPOs. Review of Accounting Studies 13 (4): 512–50. Gibbins, M., S. Salterio, and A. Webb. 2001. Evidence about auditor-client management negotiation

concerning client’s financial reporting. Journal of Accounting Research (December) 39 (3): 535– 63.

Gibbins, M., S. McCracken, and S. Salterio. 2005. Negotiations over accounting issues: The congru-

ency of audit partner and chief financial officer recalls. Auditing: A Journal of Practice and

Theory 24 (Supplement): 171–94. Gibbins, M., S. McCracken, and S. Salterio. 2007. The chief financial officer’s perspective on audi-

tor-client negotiations. Contemporary Accounting Research 24 (2): 387–422.

1526 Contemporary Accounting Research

CAR Vol. 32 No. 4 (Winter 2015)

Gibbins, M., S. McCracken, and S. Salterio. 2010. The auditor’s strategy selection for negotiation

with management: Flexibility of initial accounting position and nature of the relationship.

Accounting, Organizations and Society 35 (6): 579–95. Graham, J. R., and C. R. Harvey. 2012. The Equity Risk Premium in 2012. Working Paper, Duke

University.

Guiral-Contreras, A., J. A. Gonzalo-Angulo, and W. Rodgers. 2007. Information content and

recency effect of the audit report in loan rating decisions. Accounting & Finance 47 (2): 285–304 Hatfield, R. C., C. P. Agoglia, and M. H. Sanchez. 2008. Client characteristics and the negotiation

tactics of auditors: Implications for financial reporting. Journal of Accounting Research 46 (5):

1183–208. Hatfield, R. C., R. W. Houston, C. Stefaniak, and S. Usrey. 2010. The effect of magnitude of audit

difference and prior client concessions on negotiations of proposed adjustments. The Accounting

Review 85 (5): 1647–68. Hornstein, H. A. 1965. Effects of different magnitudes of threat upon interpersonal bargaining.

Journal of Experimental Social Psychology 1 (3): 282–93. Johnstone, K. M., J. C. Bedard, and S. F. Biggs. 2002. Aggressive client reporting: Factors affecting

auditors’ generation of financial reporting alternatives. Auditing: A Journal of Practice & Theory

21 (1): 47–65. Kelley, H. H. 1966. A classroom study of the dilemmas in interpersonal negotiation. In Strategic

Interaction and Conflict, ed. K. Archibald. Berkeley: Institute of international studies, University

of California.

Kristensen, H., and T. G€arling. (2000). Anchor points, reference points, and counteroffers in negoti-

ations. Group Decision and Negotiation, 9 (6): 493–505. Lennox, C. 2000. Do companies successfully engage in opinion-shopping? Evidence from the UK.

Journal of Accounting & Economics 29 (3): 321–37. Libby, R., R. Bloomfield, and M. W. Nelson. 2002. Experimental research in financial accounting.

Accounting, Organizations and Society 27 (8): 775–810. Loudder, M. L., I. K. Khurana, R. B. Sawyers, C. Cordery, C. Johnson, J. Lowe, and R. Wunderle.

1992. The information content of audit qualifications. Auditing: A Journal of Practice & Theory

11 (1): 69–83. Maaravi, Y., Y. Ganzach, and A. Pazy. 2011. Negotiation as a form of persuasion: Arguments in

first offers. Journal Of Personality & Social Psychology 101 (2): 245–55. McKeown, J. C., J. F. Mutchler, and W. Hopwood. 1991. Towards an explanation of auditor failure

to modify the audit opinions of bankrupt companies. Auditing: A Journal of Practice & Theory

10: 1–13. Michener, H. A., J. A. Fleishman, J. J. Vaske, and G. R. Statza. 1975. Minimum resource and

pivotal power theories. Journal of Conflict Resolution 19 (1): 89–107. National Commission on Fraudulent Financial Reporting. 1987. Report of the National Commission

on Fraudulent Financial Reporting [Treadway Report], Washington, DC: U.S. Government

Printing Office.

Ng, T., and H.-T. Tan. 2003. Effects of authoritative guidance availability and audit committee effec-

tiveness on auditors’ judgments in an auditor-client negotiation context. The Accounting Review

78 (3): 801–18. Pruitt, D. G. 1981. Negotiation Behavior. New York: Academic Press.

Pruitt, D. G., and P. J. Carnevale. 1993. Negotiation in Social Conflict. Pacific Grove, CA: Brooks/

Cole Pub. Co.

Pruitt, D. G., and D. F. Johnson. 1970. Mediation as an aid to face saving in negotiation. Journal

of Personality and Social Psychology 14 (3): 239–46. Raghunandan, K. 1993. Predictive ability of audit qualifications for loss contingencies. Contempo-

rary Accounting Research 9 (2): 612–34.

Deadline Pressure in Negotiations 1527

CAR Vol. 32 No. 4 (Winter 2015)

Reynolds, J., and J. Francis. 2001. Does size matter? the influence of large clients on office level

auditor reporting decisions. Journal of Accounting and Economics 30 (3): 375–400. Rubin, J. Z., and B. R. Brown. 1975. The Social Psychology of Bargaining and Negotiation. New

York: Academic Press.

Sanchez, M. H., C. P. Agoglia, and R. C. Hatfield. 2007. The effect of auditors’ use of a reciprocity-

based strategy on auditor-client negotiations. The Accounting Review 82 (1): 205–40. Securities and Exchange Commission (SEC). 2005. Release No. 33-8644, Revisions to Accelerated

Deadlines for Filing Periodic Reports.

Shell, G. 1999. Negotiator, know thyself. Inc 21 (6): 106.

Smith, D. L., D. G. Pruitt, and P. J. Carnevale. 1982. Matching and mismatching: The effect of own

limit, other’s toughness, and time pressure on concession rate in negotiation. Journal of Person-

ality and Social Psychology 52 (5): 876–83. Taffler, R. J., J. Lu, and A. Kausar. 2004. In denial? Stock market underreaction to going-concern

audit report disclosures. Journal of Accounting and Economics 38 (1): 263–85. Tan, H.-T., and K. Trotman. 2010. Effects of the timing of auditors’ income-reducing adjustment

concessions on financial officers’ negotiation judgments. Contemporary Accounting Research 27

(4): 1207–39. Trotman, K. T., A. Wright, and S. Wright. 2005. Auditor negotiations: An examination of the

efficacy of intervention methods. The Accounting Review 80 (1): 349–67. Van Poucke, D., and M. Buelens. 2002. Predicting the outcome of a two-party price negotiation:

Contribution of reservation price, aspiration price and opening offer. Journal Of Economic

Psychology 23 (1): 67.

Wilkins, M. 1997. Technical default, auditors’ decisions and future financial distress. Accounting

Horizons 11 (4): 40–48.

1528 Contemporary Accounting Research

CAR Vol. 32 No. 4 (Winter 2015)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.