Regan N. Schmidt

The effects of auditor rotation on client management's negotiation strategies

Purpose - – The purpose of this paper is to examine how audit partner rotation impacts the negotiation strategies client management intends to use to resolve a financial reporting issue. Design/methodology/approach - – An experiment that manipulates between participants on whether the audit partner rotates from the prior fiscal year (rotation versus non-rotation) is conducted to test the theoretical implications of rapport. Participants with a high level of business and managerial experience indicate their intended use of 25 reliable negotiation tactics that client management may use to resolve a financial reporting issue with the external auditor. These tactics underlie three distributive (contending, compromising, conceding) and two integrative (problem solving, expanding the agenda) negotiation strategies. Findings - – The results of the study indicate that client management is less contentious and more concessionary (i.e. accommodating) to a newly rotated audit partner, as compared to an audit partner that has established rapport with client management. Further, client management is more willing to intend using integrative and compromising (i.e. co-operative) negotiation strategies when negotiating with an audit partner with established rapport in contrast to a newly rotated audit partner. Research limitations/implications - – These findings underscore the merits and costs of audit partner rotation in auditor-client management (ACM) negotiations and document that partner rotation affects not only auditor behaviour, but also the behaviour of client management. Originality/value - – This paper is the first that considers how developing and maintaining rapport impacts ACM negotiations. The study provides empirical evidence to further inform debates over auditor rotation.

What Happens When Managers Plan Negotiations Instead of Partners

Most serious auditor client management (ACM) negotiations occur between audit partners and senior client management. Research also shows that audit managers often attempt to resolve issues with client management for several reasons, including efficiency. Prior negotiation research in other settings as well as accounting suggests that if partners employ different strategies than managers, different negotiation outcomes will occur. Thus, given the importance of ACM negotiation to the resulting financial statements, an understanding of the intended strategy usage of partners versus managers is important. Further, generic negotiation research provides conflicting predictions about which integrative strategies would be planned to be used when experience level versus power/status differs, the exact situation of partners and managers. We find that in the use of one strategy, working together on solving the issue cooperatively, partners and managers intend to approach negotiations the same way; but that for another strategy, bringing other potential issues into consideration, their intended strategy use differs. Focusing on intended distributive (win-lose) strategies usage, we find that while power/status and experience negotiation research predictions suggest both partners and managers should use the strategies in the same manner, our results show accounting context specific use. We find that partners and managers intended distributive strategies use interacted with important elements of the accounting context which could not be predicted beyond the general likelihood of their existence if experience and power/status matters interacts with context. Implications for both practice and research are discussed.