This is an act whereby the client accepts and approves the proposed adjustments and puts them down as requested by the auditors, which makes it much easier for the auditor to defend a clean audit opinion.
Clients are not prepared to adopt auditors’ adjustments that are advised, which forces auditors to determine on an aggregate basis the impact that proposed and/or passed audit adjustments have on a client’s financial statements sometimes.
The most usual reason why a client doesn’t make a proposed audit adjustment is simply that the client disagrees with the need for the given adjustment.
We don’t want to be seeing that audit engagement at the end of the day becoming a war between client management and auditors over a proposed adjustment of audits. Negotiations between auditors and their clients relating to adjustments to the financial statements.
While financial statements are the work of management, they are significantly a product of conjunction between management and their auditors—likely including negotiations over proposed adjustments of accounting audits.
This plantation of accounting matters talks about the implications of preceding research in psychology and social psychology related to negotiations as applied to the context of auditor and client management negotiations.
Particularly, we consider research that was recently published by Hatfield and colleagues regarding how these auditors to client conversations may be influenced in unexpected ways if not seen through the lens of negotiation.
This research looks for that distinctly stated consideration of negotiation features (for instance., whether the financial statement data that is not audited is the ‘first offer’ of client management, whether negotiations have made reciprocity pressures for the present negotiation) can influence this auditor to client conversations in forecastable ways.
Learning and knowing the unconscious biases which come from these ‘negotiation rules’ is essential for auditors to translate audit quality into improved financial statement quality effectively.
Clients should ask for adjustment entries from the auditor if these are not given. These should be operated by the client and reconciliation will be made to the preceding year’s audited trial balance. The auditor should have the ability to explain the reasons for any adjustment entries.
Client Characteristics and the Negotiation Environment
Preceding research suggests that auditors may change their approach to negotiations depending on the features of the client (Gibbins et al. 2001; Sanchez et al. 2007). Although, auditors’ utilization of a reciprocity-based pattern may be Influenced by certain client characteristics.
Which means, an auditor would not need to utilize a reciprocity-based pattern or strategy unless the client/negotiation environment warrants it. One feature that may affect the negotiation environment is the negotiator style (Pruitt and Carnevale 1993).
A negotiator’s penchant for perverse tactics usually leads to competitive, or non-collaborative, environments (e.g., Druckman 1986). In contrast, actions like sharing of Information and concession can help to promote a more collaborative environment (Putnam 1990).
Conversations with audit partners from Big 4 firms shows that some client managers are reluctant to post any adjustments to the financial statements (competitive clients), while other clients are more open to posting adjustments (collaborative clients).
As a collaborative environment is characteristically in the auditors’ best interest, a competitive client manager can cause difficulty for the auditor.
A second client feature that may affect the negotiation environment is the relative strength of a negotiator’s position. In an audit matter, client retentivity risk may influence the strength of the client management’s negotiating status.
A client that is imploring bids for next year’s audit would represent a larger risk to client retention than one that is not categorically considering an auditor change.
Although the work for engaging or terminating the auditor extremely lies with the audit committee (for public companies at least), management normally still has considerable input.
Hence, it could be advantageous to the auditor for management to view them favorably, especially when a retention decision is hovering. If management isn’t favoring the auditor, the audit committee is likely not to retain the auditor.
However, when a client is imploring bids, client management is likely to be put in a relatively stronger position than when retentivity risk is low.
The negotiation literature shows that when one of the negotiators has bigger (or increased) strength relative to a fellow, the stronger side is likely to expect larger concessions (Hornstein 1965; Michner et al. 1975).
Accordingly, auditors may be more likely to use a reciprocity-based pattern or strategy when the client is regarded to be soliciting bids for next year’s audit (high retention risk) than when retention risk is very low.