The effect of auditors' communication of the professional practice department involvement on audit negotiations

Auditor-Client negotiation about difficult client accounting issues involves the auditor, the client, and various other parties on both the client and auditor side. On the auditor side, the Professional Practice Department has been reported to play a significant role in the financial reporting process, yet is rarely the focus of academic study. In this study, I investigate how communicating the involvement of the Professional Practice Department (PPD) to top management using different influence techniques impacts negotiated outcomes between audit partners and top management. I examine the impact of communicating the involvement of the PPD in the context of two other variables found in prior auditing literature to be important in the negotiation process, auditor type and CFO (Chief Financial Officer) preferred auditor-type. While auditors must attest that the financial statements are free from material misstatement, they also must ensure they foster a functional working relationship with the client. The auditor-client context is unique, and takes place within an on-going relationship where expectations and preferences have been established. Therefore, I examine these negotiation outcomes while incorporating a key contextual variable, auditor-type, in the negotiations. Both the CFO's preference for auditor-type, as well as actual auditor-type will be examined in addition to the specific influence tactic. I use a 3x2x2 fully factorial design to experimentally analyze the impact of two manipulated variable (influence tactic and auditor-type) and one measured variable (CFO preference for auditor-type) on two dependent variables. The two dependent variables are the CFO's willingness to post an adjustment to the financial statements and the CFO's satisfaction with the audit partner. I report the results of an audit negotiation experiment in which 154 highly experienced CFOs responded to a case scenario that incorporated or measured the three key variables (influence tactic communicating PPD involvement, auditor-type and CFO preference for auditor type). My results indicate that using the most aggressive influence tactic to communicate the Professional Practice Department's involvement had a mixed effect on the CFOs willingness to post adjustments to the financial statements. The CFOs in this influence condition that were paired with an accommodating auditor-type reported a higher willingness to adjust the financial statements while CFOs paired with a proactive and advising auditor-type reported a lower willingness to post adjustments. All CFOs reported less satisfaction with the audit partner when the most aggressive influence tactic was used to communicate the Professional Practice Department's inyolvement. Furthermore, the CFO's preference for an auditor-type significantly affects negotiation outcomes. CFOs that prefer more proactive and advising audit partners are more likely to post adjustments to the financial statements, regardless of whether or not. they are informed of the Professional Practice Department's involvement. These same CFOs report a high level of satisfaction with the audit partner and their satisfaction is not impacted by the type of audit partner they are paired with. CFOs that prefer more reactive and accommodating audit partners are less willing to adjust the financial statements and report less satisfaction (dissatisfaction), when paired with proactive and advising audit partners. These results highlight the importance of the existing relationship within the auditor-client dyads and help support findings from auditor-client negotiation research which show that prevailing expectations of the CFO are a contextually important feature of audit negotiation and should be incorporated into more research. I also show that aggressive tactics can help persuade some CFOs to adjust the financial statements; however, consistently pushing too aggressively results in reduced cooperation. Furthermore, there are large costs in terms of the CFO's satisfaction with the audit partner in using aggressive tactics, and therefore, practically speaking the tactic that could potentially be the most effective may result in a lost client.