Managerial Auditing Journal

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

Regan N. Schmidt Britney E. Cross
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Regan N. Schmidt Britney E. Cross , (2014),"The effects of auditor rotation on client management's
negotiation strategies", Managerial Auditing J ournal, Vol. 29 Iss 2 pp. 110 - 130
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The effects of auditor rotation
on client managements
negotiation strategies
Regan N. Schmidt and Britney E. Cross
Edwards School of Business, University of Saskatchewan, Saskatoon, Canada
Abstract
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 nancial reporting issue.
Design/methodology/approach An experiment that manipulates between participants on
whether the audit partner rotates from the prior scal 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 nancial 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 ndings 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 rst that considers how developing and maintaining rapport
impacts ACM negotiations. The study provides empirical evidence to further inform debates over
auditor rotation.
Keywords Negotiation, Rapport, Auditor, Client management, Rotation
Paper type Research paper
Introduction
A recent pronouncement from the European Commission to reform the European audit
market, including mandatory audit rm rotation, has reopened debate on the merits
and costs of auditor rotation (European Commission, 2011). Repeat audit engagements
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0268-6902.htm
JEL classication M42
The authors thank Lily Zheng Brooks, Richard Hateld, Fred Phillips, Joseph Schmidt, and
Ganesh Vaidyanathan for their detailed comments and workshop participants at the University
of Saskatchewan accounting workshop and the 2013 Canadian Academic Accounting
Association Annual Conference. The authors thank the editors and anonymous reviewers for
their helpful suggestions and constructive comments. The support of Nola Buhr and
Mark Klassen is gratefully appreciated. The authors acknowledge the nancial support from the
Edwards School of Business Centre for Advancement of Accounting Education. This paper is
based on the University of Saskatchewan undergraduate accounting honours research project
completed by Britney E. Cross, under the supervision of Regan N. Schmidt.
Managerial Auditing Journal
Vol. 29 No. 2, 2014
pp. 110-130
qEmerald Group Publishing Limited
0268-6902
DOI 10.1108/MAJ-03-2013-0836
MAJ
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provide the auditor with the opportunity to accumulate knowledge of the clients
nancial reporting practices and internal controls over nancial reporting. Though
increased client-specic experience is crucial to audit quality (Carcello et al., 1992;
Johnson et al., 2002), standard setters have struggled to determine when auditor
familiarity with the client may threaten the external auditors independence
(Dopuch et al., 2001). In response to these concerns in the American nancial market,
the Sarbanes-Oxley Act of 2002 Section 203 requires engagement audit partners to rotate
every ve years to strengthen external auditor independence (US House of
Representatives, 2002). Although prior archival research has documented the effects
of auditor rotation on overall audit quality (Carey and Simnett, 2006) and earnings
quality (Chen et al., 2008), there is sparse empirical evidence examining the effect of
auditor rotation on specic audit tasks. This paper examines one such audit task,
auditor-client management (ACM) negotiations, and specically examines how client
management negotiation strategies over nancial reporting issues are affected by audit
partner rotation.
Negotiations between client management and the auditor to resolve nancial
reporting issues occur within a context that is inuenced by interpersonal interactions.
Gibbins et al. (2001) identies that one particular element of these interpersonal
interactions is the audit partners past relationship with the client (Beattie et al., 2004).
Hence, from an ACM negotiation model perspective, rotation of audit partners has an
impact on the process and potential outcome of the negotiation (i.e. audited nancial
statements). Hateld et al. (2011) was the rst to examine the effects of auditor rotation
on the auditors negotiation strategies; however, no research has examined how
rotation impacts client managements negotiation strategies. Focusing on the other
side of the dyad is important, as one partys actions in a negotiation inuence the other
partys response (Bame-Aldred and Kida, 2007; Sanchez et al., 2007; Hateld et al., 2008;
Gibbins et al., 2005, 2007). In the context of mandated audit partner rotation, client
management is forced to develop rapport with the newly rotated audit partner in
contrast to when rapport has already been established with the previous non-rotated
audit partner. Rapport has theoretical implications for the types of negotiation
strategies used in conict resolution (Tickle-Degnen and Rosenthal, 1990).
To examine how developing rapport and established rapport impacts client
managements intended negotiation strategies, we conduct an experiment that
manipulates whether the engagement audit partner is newly rotated to the engagement
or whether the engagement audit partner is the same as the prior year. The theoretical
implications of rapport are then examined by measuring the participants intended use
of 25 negotiation tactics that represent three distributive negotiation strategies and two
integrative negotiation strategies. These tactics are adapted from prior research
(McCracken et al., 2011) to the client management negotiation context.
Whereas distributive strategies focus on dividing a xed pie of resources
(i.e. win-lose), integrative strategies focus on expanding the pie of resources
(i.e. win-win) and typically results in higher joint outcomes (Bazerman et al., 1985).
Focusing on the intended use of distributive negotiation strategies, consistent with the
theory of rapport development, the results demonstrate client management intends to be
relatively accommodating to the newly rotated audit partner, as evidenced by intending
to use less contending and more concessionary strategies. Stated differently, client
management intends to be more contentious and less concessionary to the audit partner
Effects of auditor
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with which they have established rapport (i.e. the non-rotated audit partner), as
compared to the newly rotated audit partner. In regard to the intended usage of
integrative negotiation strategies, the results document that client management intends
to use integrative strategies to a greater extent with audit partners with which rapport
has been previously established (i.e. the non-rotated audit partner) as compared to the
newly rotated audit partners, providing further support for the theory. That is,
established rapport facilitates co-operation (rather than accommodation) to resolve the
nancial reporting issue.
This study provides further empirical evidence on the costs and merits of auditor
rotation in one specic audit task ACM negotiations. The distributive strategy
results underscore the merits of audit partner rotation, whereby client management is
more willing to concede and less willing to contend with the newly rotated audit
partner. However, the results for the intended usage of integrative strategies call for
future research to examine whether the benets of increased intended usage of
integrative strategies with non-rotated audit partners outweigh the costs of not
rotating partners (i.e. familiarity threats).
The paper proceeds as follows. The next section reviews relevant research and
outlines our research hypotheses and research question. The following section contains
the experimental method, including the experimental setting and design. Our results
are presented in the subsequent section followed by a discussion of the conclusions,
limitations, and future research.
Background and hypothesis development
The ACM negotiation model developed by Gibbins et al. (2001) underscores
interpersonal context as a category of contextual features that impacts the nancial
reporting issue resolution process. After inherent risk, the audit partners past
relationship with the client was rated as the highest in importance among the
interpersonal contextual variables proposed in their model. Corroborating these
ndings, Beattie et al.s (2000) descriptive research documented the high level of
interactive relations between client-management and the auditor when resolving
nancial reporting issues and called for further research focused on the interpersonal
relationship (Beattie et al., 2001; Salterio, 2012 continues to call for future research
in this area). Accordingly, Beattie et al.s (2004) grounded theory model of ACM
negotiations documented that the quality of the relationship between client
management and the auditor was a critical contextual factor impacting both the
effectiveness and efciency of the audit. As such, rotating audit partners, as mandated
by Sarbanes-Oxley Act of 2002 Section 203 (US House of Representatives, 2002) and
recent pronouncements of audit rm rotation in the European market (European
Commission, 2011), is likely to have an impact on the ACM negotiation process.
Previous research that has examined audit partner rotation has focused on the effects
on the auditor (Daugherty et al., 2012), and research specic to ACM negotiations has
paralleled this research by focusing on auditor behaviour. Dopuch et al. (2001) found that
mandatory auditor rotation improved auditor independence, as evidenced by a decrease
in the bias contained in the auditors reports. Wang and Tuttle (2009) extended these
ndings to document that auditors in a mandatory rotation regime were relatively less
cooperative with client management as compared to auditors in a non-mandatory
rotation regime. Wang and Tuttles experimental economics study focused on time
MAJ
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periods leading up to an auditor rotation (as compared to what happens after rotation
the focus of this study), and their results failed to nd support that auditor rotation
impacted client managements negotiation strategies.
Outside of experimental economics, Hateld et al. (2011) found that auditors who
did not have prior involvement with client management proposed larger audit
adjustments, as compared to auditors that did have prior involvement with a client.
Hateld et al.s results support their conclusion that auditor rotation may have a
benecial impact on the audit, at least in regard to the auditor side of the dyad in the
ACM negotiation task. The results from Hateld et al. motivate two questions. First,
given that ACM negotiations occur in a dyad whereby one partys actions impact the
other partys response (Sanchez et al., 2007), how does auditor rotation impact the
negotiation behaviour of client management? Second, Hateld et al. examined how
auditor rotation impacted the auditors proposed audit adjustment in dollar gures;
however, what negotiation strategies are used to achieve this dollar gure or resolve
the conict? Examining negotiation strategies, rather than the proposed dollar gure
audit adjustment, is critical given that client management does not propose the audit
adjustment, and different negotiation strategies can be used to achieve the same dollar
Figure (McCracken et al., 2011; Goodwin, 2002; Bame-Aldred and Kida, 2007).
Rapport
The ACMnegotiationresearchhas documented the importance of the dyadic relationship
between the auditor and client management, and how it evolves over time
(McCracken et al., 2008). Part of this evolution involves the development of rapport,
and maintenance of established rapport between the auditor and client management
(Fiolleau et al., 2013; Hunt and Price, 2002). Rapport exists as part of this interactive
relationship (Tickle-Degnen andRosenthal, 1990) regardless of whether the ACMcontext
is adversarial or cooperative (Bernieri et al., 1996), and it permits each party to familiarize
themselves with the behaviours of the other party. As noted by Tickle-Degnen
and Rosenthal (1990), an unfamiliar other would not be as predictable as a known other
(p. 286); however, over repeated interactions, the unfamiliar others behaviour, would
become more predictable, and we would learn how to accommodate ourselves to it, as
wouldthe other toours (p. 287). As discussedbelow, developingrapport andmaintaining
rapport has theoretical implications on the types of strategies used to resolve conict.
Developing rapport: implications on distributive negotiation strategies
Rapport is an amicable interaction, characterized by a personal connection between
two interactants (Gremler andGwinner, 2000, p. 92). Developingrapport, therefore, is the
effort to create this personal connection (Ross and Wieland, 1996), and prior research has
underscored the importance of developing rapport when one party is dependent on the
other party (Bendapudi and Berry, 1997), for example, for receiving an unqualied
audit report. The signicance of developing rapport has been documented in a variety of
contexts including patient treatments and outcomes in medicine (Leach, 2005) and
customer satisfaction and loyalty in business (Bendapudi and Berry, 1997). For example,
Gremler and Gwinner (2008) examined how participants in the roles of customer
and employee developed rapport when initiating a relationship with the other party.
Their results documented that employees tried to develop rapport with customers by
being especially attentive and courteous, to the point that their actions were not in the
Effects of auditor
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best interest of the employees company, and customers identied these same
accommodating strategies as instrumental in developing rapport. Given that client
managements behaviour in resolving nancial reporting issues impact the ACM
relationship (Rennie et al., 2010), this pattern of accommodating behaviour to the other
party serves to build a relationship for future interactions (Gremler and Gwinner, 2008;
Thompson, 2001).
Figure 1 shows distributive negotiation strategies as a continuum. Theoretically, on
one end of the continuum, contentious negotiation strategies constitute no concessions
to the other party, moderate compromising negotiation strategies constitute some
concessions, and concessionary negotiation strategies on the other end of the
continuum, by denition, are lots of concessions. Based on the above theoretical
framework, Figure 1 shows that developing rapport with a new audit partner shifts the
intended use of distributive negotiation strategies. Stated simply, building rapport will
result in conceding more, and therefore contending less. Accordingly, when client
management is developing rapport with the newly rotated audit partner, we predict that
client management will intend to use less contentious and more concessionary
negotiation strategies as compared to when there is no auditor rotation. Stated formally:
H1. Client management will intend to use contending tactics less when there is
auditor rotation as compared to when there is no auditor rotation.
H2. Client management will intend to use concessionary tactics more when there
is auditor rotation as compared to when there is no auditor rotation.
Whereas the theory of rapport development provides directional predictions on client
managements intended use of two extreme distributive negotiation strategies
(contending and conceding), it is unclear how rapport development impacts client
managements use of moderate negotiation strategies. Specically, a third distributive
negotiation strategy, compromising, resides between the two extremes of contending
and conceding. As shown in Figure 1, when comparing auditor rotation to non-rotation,
it is difcult to predict how compromising will be used differently. Given the lack of
theory to provide a directional prediction, we pose the following research question
to investigate the effects of auditor rotation on client managements intended use of
compromising tactics:
Figure 1.
Continuum of distributive
negotiation strategies
Contending Conceding Compromising
Rotated Auditor
Relatively less contending (H1) & more conceding (H2)
Non-rotated Auditor
Relatively more contending (H1) & less conceding (H2)
MAJ
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RQ. How does auditor rotation impact client managements intent to use
compromising tactics relative to when there is no rotation?
Established rapport: implications on integrative negotiation strategies
Rapport is dynamic with different behavioural manifestations depending upon
whether the rapport is developing (as discussed above), or whether rapport has been
established (Tickle-Degnen and Rosenthal, 1990). Rapport can be established by
having a prior relationship (Nadler, 2004). In the ACM negotiation context, rapport
would be relatively established when client management has interacted with the
engagement audit partner, for example, during the prior scal year audit (Bamber and
Iyer, 2007; Fiolleau et al., 2013).
Previous research, using a variety of research methods, has found that established
rapport increases the extent of integrative behaviour and reduces the likelihood of
impasse (Thompson, 2001). For example, examining over 2,200 federal civil cases,
Johnston and Waldfogel (2002) found that attorney pairs that have established
relationships are more likely to settle the case (i.e. avoid impasse) and are more timely in
their resolution as compared to attorney pairs that did not have established
relationships. In an experimental context using business students as participants,
Moore et al. (1999) found that the presence of a previous relationship between
negotiators established rapport which led to decreased rates of impasse. Corroborating
results were documented by Drolet and Morris (2000) whereby in a prisoner dilemma
task, dyadic rapport increases integrative negotiation behaviour as evidenced by higher
joint outcomes. Wang (2010), in an experimental economics study, documented that
renewable contracts that allowed for long-term established relationships resulted in a
lower frequency of impasse of negotiated asset fair values than one-period contracts.
Finally, based on a survey of experienced negotiation mediators, Goldberg (2005, p. 369)
documented that established rapport permitted respondents to generate novel or
creative solutions to the dispute. Accordingly, we predict that having established
rapport increases the likelihood of using integrative tactics. Stated formally:
H3. Client management will intend to use integrative (problem solving and
expanding the agenda) tactics more when there is no auditor rotation as
compared to when there is auditor rotation.
Experimental method
The experimental setting and procedures
The experimental case was adapted from prior ACM negotiation research
(McCracken et al., 2011, with permission) and was modied for the purposes of this
study. The adapted experimental instrument was pilot tested with undergraduate
participants, to ensure case clarity, before using in the study. Participants were asked to
assume the role of the chief nancial ofcer of a hypothetical company and were
provided background information of the company and its prior interactions with the
external auditor[1]. Participants were then informed that the auditor is considering an
income-decreasing adjustment due to overstated inventory amounts, caused by both
clear cut errors and differences in estimates. In the upcoming meeting with the audit
partner, participants were asked to indicate the likelihood of using the distributive
and integrative strategies tactics to resolve the proposed inventory write down
issue (Part A).
Effects of auditor
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After completing the questionnaire, participants were informed that the inventory
negotiation never came to fruition as the audit team resolved the issue and were able to
render an unqualied audit opinion for the scal year ended December 31, 2011.
Participants then proceeded to the next section of the questionnaire that asked how
they would resolve the same nancial reporting issue if it were to recur in a future
scal year using the same list of negotiation tactics (Part B)[2]. After all completed
materials were submitted, participants were advised that the researcher would return
later with further instructions[3].
After an approximate two hour time delay, the researcher returned and administered
the nal section of the questionnaire that asked the participants to assume that the
2012 scal year end audit was now taking place. Participants were randomly assigned
to audit partner rotationcondition(not rotatedcontrol conditionversus rotatedcondition),
andwere informed that the audit partner is consideringan income-decreasingadjustment
due to overstated inventory amounts caused by both clear cut errors and differences in
estimates. Participants indicated the likelihood of using the same list of distributive
andintegrative negotiationtactics to resolve the nancial reporting issue inthe upcoming
negotiation with the auditor partner (Part C)[4]. After completing the negotiation
strategy questionnaire, participants responded to debrieng questions and manipulation
checks (Part D). See Figure 2 for an illustration of the experimental procedures.
Experimental design
The experiment is a 2 1 between-participant design that manipulates audit partner
rotation (not rotated control condition versus rotated condition) and measures the
participants intended use of 25 negotiation tactics that underlie three distributive and
two integrative negotiation strategies.
Independent variable: audit partner rotation. A notable strength of the studys
design is that the participants established rapport with the initial audit partner
during interactions pertaining to the previous 2011 scal year audit. This design
feature is held constant across all conditions as was the passage of real time between
the 2011 scal year audit part of the case and the 2012 scal year audit part of the case
(as discussed above). In the 2012 scal year audit, participants were randomly assigned
to either the rotated audit partner condition or the non-rotated control condition which
held the audit partner from the previous scal year audit constant (Figure 2).
Specically, in the 2012 year end audit, participants in the rotation condition were
informed that due to mandatory audit partner rotation requirements, the 2011 year end
audit partner was required to rotate off of the engagement, and would not be involved in
the scal 2012 year end audit. A different audit partner from the same audit rm would
lead the audit engagement. The participants were informed that they had been
introduced to the new audit partner previously, but had not had any working
relationship with him. By rotating only the audit partner (and not the audit rmor audit
team), the experiment controls for any potential confounds that would arise when an
entire audit rm rotates (e.g. large international rm with an unblemished conservative
reputation; relations between the audit staff and the accounting staff).
Dependent variables. In the upcoming negotiation with the audit partner regarding
the proposed inventory write down, participants indicated their likelihood of using
each of the 25 negotiation tactics listed in the Appendix. These tactics represent two
integrative and three distributive strategies and were presented in random order.
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The distributive strategies consisted of contending, compromising, and conceding
strategies, with ve tactics for each strategy. The integrative strategies consisted of
problem solving and expanding the agenda strategies, again with ve tactics for each
strategy. Participants were required to indicate their responses on an eight-point scale
ranging from 0 (very unlikely to use) to 7 (very likely to use).
This list of negotiation tactics was adapted and extensively modied from
McCracken et al. (2011), with permission. McCracken et al.s study extended Rahim
(1983) by adapting 25 negotiation tactics related to contending, compromising,
conceding, problem solving, and expanding the agenda strategies to the audit
institutional context. Specically, McCracken et al.s adapted measures were negotiation
tactics that may be used by auditors in negotiations with client management
Figure 2.
Experimental procedures
Company Background &
Financial Reporting Issue
Auditor Partner
Not Rotated (Control)
Part D
Debriefing & Manipulation Checks
Part A
Negotiation Tactics to Resolve
Financial Issue (2011 year-end)
Part B
Negotiation Tactics to Resolve
Financial Issue If It Recurs
Auditor Partner
Rotated
Part C
Negotiation Tactics to Resolve
Financial Issue (2012 year-end)
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(e.g. contending tactic no. 3: I would use my ability to qualify JELs nancial statements
to obtain a resolution in my favor). In the current study, the adapted list of negotiation
tactics were extensively modied and tailored to tactics that may be used by client
management in negotiations with the auditor (e.g. contending tactic no. 3: I would try to
use my inuence to re the auditor to obtain a resolution in my favor).
Participants
In total, 51 MBA students from a large university participated in the study. The
multi-part experimental materials were completed during a three-hour class in the
presence of a researcher. All participants were provided with a at remuneration of $20
and entry into a draw for $100[5].
Results
Reliability of client management negotiation strategies
The purpose of the rst two elicitations of the negotiation strategy questionnaire was
to assess the reliability of the new measures (i.e. Parts A and B). Using all data
available and focusing on the rst elicitation of the negotiation strategy questionnaire
(i.e. Part A), Cronbachs a coefcients for the contending, compromising, conceding,
problem solving, and expanding the agenda tactics were 0.74, 0.79, 0.73, 0.78, and 0.61,
respectively, all of which achieve reasonable levels of reliability, especially given the
small number of tactics comprising each strategy (Tan, 2001; DeVellis, 2003)[6].
The second elicitation of the negotiation strategy questionnaire was to assess
test-retest reliability. Test-retest Pearson correlation coefcients for the contending,
compromising, conceding, problem solving, and expanding the agenda strategy tactics
were 0.83 ( p , 0.0001), 0.71 ( p , 0.0001), 0.81 ( p , 0.0001), 0.71 ( p , 0.0001), and 0.71
( p , 0.0001), respectively, all of which achieve reasonable levels of reliability
(Nunnally and Bernstein, 1994)[7].
Experimental manipulation checks
We used two questions to examine whether participants attended to the auditor
rotation manipulation. Both questions were on an 11-point scale with the endpoints
labeled strongly disagree (25) to strongly agree (5) with the mid-point of zero
labeled neither agree nor disagree. The rst question asked whether the audit
partner responsible for the 2012 year end audit was the same audit partner responsible
for the 2011 year end audit whereas the second question asked whether the participant,
knew the 2012 year end audit partner just as well as you knew the 2011 year end audit
partner. Summing these two measures, any participant that responded on the incorrect
side of the summed scale was dropped from the analysis. This conservative approach
resulted in exclusion of 11 participants leaving a total number of 39 participants for the
tests of hypotheses[8].
As captured by categorical debrieng questions, the experimental participants had
a signicant level of business experience as evidenced by a median level of between
ve and ten years which is consistent with previous ACM negotiation research that has
used similar participant samples (Perreault and Kida, 2011). The majority of the
participants held managerial-level positions at the time of the experiment, and dividing
the sample at the median position level and including this dichotomous variable
in the analysis does not change the reported results[9]. Finally, participants were
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asked whether they found the case easy to understand on an 11-point scale ranging
from 25 (strongly disagree) to 5 (strongly agree) with the midpoint of zero
labeled neither agree nor disagree. The mean response of 3.3 (SD 1.7) is statistically
signicantly greater than the scale midpoint (t
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providing evidence that the participants understood the case context.
Experimental results
In the results that follow, given the acceptable Cronbachs a coefcients, we sum each
of the ve tactics for each negotiation strategy to yield a composite measure for use in
an ANOVA. As recommended by Tabachnick and Fidell (2007), the composite measure
is the dependent measure of interest when testing the above hypotheses; however we
also subsequently examine each tactic individually.
Test of H1: contending tactics. As an overall test of H1, we sum the ve contending
tactics to yield a composite measure (CTDSUM). As illustrated in Table I, the results of
a one-way ANOVA using auditor rotation as the independent variable and the
composite contending measure as the dependent variable documents statistically
signicant support for H1 (F 4.66, p
(one-tailed)
0.019); that is, client management
intends to use the contending tactics less when there is audit partner rotation as
compared to when the audit partner is not rotated. Examining the contending tactics
individually, the results of one-way (auditor rotation) ANOVAs using the respective
contending tactic as the dependent variable provides further support for H1.
Specically, two of the contending tactics are statistically signicant (CTD3 and
CTD4), and two tactics are marginally signicant (CTD2 and CTD5).
Test of H2: concessionary tactics. To provide an overall test of H2, we again sum the
ve concessionary tactics to yield a composite measure (CEDSUM). Documented in
Table II, the results of a one-way ANOVA using auditor rotation as the independent
variable and the composite concessionary measure as the dependent variable yields
marginally signicant support for H2 (F 2.63, p
(one-tailed)
0.057) whereby client
management intends to use the concessionary tactics more when there is audit partner
rotation as compared to when the audit partner is not rotated. Examining the
concessionary tactics individually, the results of one-way (auditor rotation) ANOVAs
using the respective concessionary tactic as the dependent variable provides further
Rotation
One-way ANOVA
Tactic
Audit partner
constant condition
Mean (SD)
Audit partner
rotation condition
Mean (SD) DF Type III SS F-value p-value
a
CTD1 2.49 (1.74) 1.86 (1.79) 1 3.679 1.19 0.141
CTD2 2.97 (1.85) 1.91 (2.03) 1 10.457 2.83 0.051
CTD3 1.65 (1.74) 0.60 (0.61) 1 10.446 5.34 0.013
CTD4 4.12 (1.67) 2.81 (2.10) 1 16.174 4.68 0.019
CTD5 3.14 (1.92) 2.10 (2.01) 1 10.189 2.66 0.056
CTDSUM 14.37 (6.93) 9.29 (7.65) 1 243.288 4.66 0.019
Notes:
a
Tabulated p-values are one-tailed only when in the hypothesized direction; otherwise
two-tailed; italicized tactics are either statistically signicantly ( p , 0.05) or marginally ( p , 0.10)
different; each tactic is described in the Appendix; participants were required to indicate their
responses on an eight-point scale ranging from 0 (very unlikely to use) to 7 (very likely to use)
Table I.
Analysis of H1:
descriptive statistics and
univariate analysis of
contending tactics
Effects of auditor
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support for H2. Two of the concessionary tactics are statistically signicant (CED1 and
CED3), and one tactic is marginally signicant (CED2).
Test of RQ: compromising tactics. To investigate the research question, we rst
examine the descriptive statistics contained in Table III and note that all ve
compromising tactics are consistently in the same direction such that client management
intends to use the compromising tactics more when the audit partner is held constant as
compared to when the audit partner has rotated. A composite measure is created by
summing the ve compromising tactics (COMPSUM). Providing support for the above
conjecture, a one-wayANOVAusingauditor rotationas the independent variable andthe
composite compromising measure as the dependent variable yields marginally
signicant results (F 3.36, p
(two-tailed)
0.075)[10]. Examining the compromising
tactics individually, the results of one-way (auditor rotation) ANOVAs using the
respective compromising tactic as the dependent variable documents that one
compromising tactic is statistically signicant (COMP1) and another tactic achieves
marginal levels of statistical signicance (COMP2).
Rotation
One-way ANOVA
Tactic
Audit partner
constant condition
Mean (SD)
Audit partner
rotation condition
Mean (SD) DF Type III SS F-value p-value
a
COMP1 4.55 (1.35) 3.50 (1.69) 1 10.360 4.63 0.038
COMP2 4.05 (1.83) 2.99 (2.06) 1 10.696 2.88 0.098
COMP3 4.33 (1.16) 3.76 (1.56) 1 3.044 1.70 0.200
COMP4 2.93 (1.38) 2.38 (1.50) 1 2.911 1.42 0.241
COMP5 2.30 (1.53) 2.04 (1.63) 1 0.629 0.25 0.617
COMPSUM 18.16 (4.67) 14.66 (7.25) 1 115.195 3.36 0.075
Notes:
a
The p-values in this table are two-tailed due to the non-directional research question; italicized
tactics are either statistically signicantly ( p , 0.05) or marginally ( p , 0.10) different; each tactic is
described in the Appendix; participants were required to indicate their responses on an eight-point
scale ranging from 0 (very unlikely to use) to 7 (very likely to use)
Table III.
Analysis of RQ:
descriptive statistics and
univariate analysis of
compromising tactics
Rotation
One-way ANOVA
Tactic
Audit partner
constant condition
Mean (SD)
Audit partner
rotation condition
Mean (SD) DF Type III SS F-value p-value
a
CED1 3.86 (1.60) 4.95 (1.41) 1 11.236 4.70 0.019
CED2 4.41 (1.59) 4.74 (1.57) 1 3.467 1.71 0.099
CED3 3.44 (1.78) 4.59 (1.34) 1 12.143 4.52 0.020
CED4 2.63 (1.59) 3.06 (2.11) 1 2.504 0.75 0.196
CED5 3.86 (1.84) 3.64 (2.15) 1 0.443 0.11 0.737
CEDSUM 18.21 (5.84) 21.40 (6.07) 1 92.464 2.63 0.057
Notes:
a
Tabulated p-values are one-tailed only when in the hypothesized direction; otherwise
two-tailed; italicized tactics are either statistically signicantly ( p , 0.05) or marginally ( p , 0.10)
different; each tactic is described in the Appendix; participants were required to indicate their
responses on an eight-point scale ranging from 0 (very unlikely to use) to 7 (very likely to use)
Table II.
Analysis of H2:
descriptive statistics and
univariate analysis of
concessionary tactics
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Test of H3: integrative tactics. Focusing on the rst integrative strategy, problem
solving, we rst examine the descriptive statistics contained in Table IV Panel A and
note that four of the ve problem solving tactics, and the summed composite measure
(PSSUM), are in the direction predicted by H3. However, the results of a one-way
ANOVA using auditor rotation as the independent variable and the composite problem
solving measure as the dependent variable yields statistically non-signicant results.
Further, the results of one-way (auditor rotation) ANOVAs using the respective
problem solving tactic as the dependent variable documents that only a single tactic
(PS3) marginally supports H3.
For the second integrative strategy, we sum the ve expanding the agenda tactics to
yield a composite measure (EASUM). As illustrated in Table IV Panel B, the results of
a one-way ANOVA using auditor rotation as the independent variable and the
expanding the agenda composite measure as the dependent variable documents
statistically signicant support for H3 (F 2.92, p
(one-tailed)
0.048); that is, client
management intends to use the expanding the agenda tactics more when there has not
been audit partner rotation as compared to when audit partners have rotated.
Examining the expanding the agenda tactics individually, the results of one-way
(auditor rotation) ANOVAs using the respective expanding the agenda tactic as the
dependent variable provides further support for H3. Specically, one of the expanding
the agenda tactics is statistically signicant (EA4) and two other tactics achieve
marginal levels of statistical signicance (EA1 and EA5)[11].
Additional analysis
To examine whether the above theory generalizes to a different sample of participants
with greater accounting experience, we conducted a replication of the experiment
Rotation
One-way ANOVA
Tactic
Audit partner
constant condition
Mean (SD)
Audit partner
rotation condition
Mean (SD) DF Type III SS F-value p-value
a
Panel A: descriptive statistics and univariate analysis of problem solving tactics
PS1 5.63 (1.49) 6.05 (0.93) 1 1.696 1.01 0.321
PS2 5.43 (1.02) 5.13 (2.09) 1 0.906 0.38 0.271
PS3 5.74 (0.69) 5.20 (1.81) 1 2.743 1.70 0.100
PS4 5.02 (1.37) 4.46 (2.08) 1 2.905 1.01 0.161
PS5 5.21 (1.35) 5.20 (1.48) 1 0.001 0.00 0.492
PSSUM 27.03 (3.95) 26.04 (6.00) 1 9.222 0.39 0.269
Panel B: descriptive statistics and univariate analysis of expanding the agenda tactics
EA1 2.45 (1.52) 1.70 (1.65) 1 5.339 2.15 0.076
EA2 5.21 (1.43) 5.35 (1.28) 1 0.188 0.10 0.754
EA3 5.56 (1.26) 5.69 (1.06) 1 0.162 0.12 0.736
EA4 2.48 (1.75) 1.35 (1.28) 1 12.012 4.83 0.017
EA5 2.17 (1.55) 1.46 (1.71) 1 4.660 1.78 0.095
EASUM 17.86 (4.14) 15.55 (4.18) 1 50.389 2.92 0.048
Notes:
a
Tabulated p-values are one-tailed only when in the hypothesized direction; otherwise
two-tailed; italicized tactics are either statistically signicantly ( p , 0.05) or marginally ( p , 0.10)
different; each tactic is described in the Appendix; participants were required to indicate their
responses on an eight-point scale ranging from 0 (very unlikely to use) to 7 (very likely to use)
Table IV.
Analysis of H3:
integrative negotiation
tactics
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(Lindsay and Ehrenberg, 1993). The previous multi-part experimental materials were
adapted to a single-part experiment, which provided details of the interactions with the
2011 scal year audit partner. In the 2012 scal year audit, participants were randomly
assigned to audit partner rotation condition (not rotated control condition versus rotated
condition). Participants indicated their likelihood of using each of the 25 negotiation
tactics to resolve the nancial reporting issue in the upcoming negotiation with the
auditor partner. All other aspects of the case were the same as the main study
(e.g. nancial reporting issue, nature of previous interactions with the auditor, etc.).
A total of 67 accounting practitioners attending a graduate program from a large
university participated in the study outside of class in the presence of a researcher with
no remuneration. Consistent with the main study, one participant that responded on
the incorrect side of the summed manipulation check scale was excluded from the
analysis. The participants rated the case easy to understand and reported that the
nancial reporting issue was easy to understand[12]. Finally, this sample of
participants had a greater level of accounting experience than the previous MBA
sample as evidenced by the self-reported accounting experience and number of
accounting classes completed[13].
Focusing rst on the composite contending measure as the dependent variable, the
results of a one-way (auditor rotation) ANOVA found the rotation condition mean of
14.7 (SD 5.1) to be less than the non-rotated control condition mean of 18.6 (SD 5.2)
providing statistically signicant support for H1 (F 9.59, p
(one-tailed)
0.001).
Second, focusing on the composite concessionary measure as the dependent variable,
the results of a one-way (auditor rotation) ANOVA found the rotation condition mean
of 19.2 (SD7.7) to be greater than the non-rotated control condition mean of 16.8 (SD6.5)
yielding marginally signicant support for H2 (F 1.90, p
(one-tailed)
0.087). Third,
focusing on the composite problem solving measure as the dependent variable, the
results of a one-way (auditor rotation) ANOVA found the non-rotation control
condition mean of 29.4 (SD 4.2) to be greater than the rotation condition mean of 27.1
(SD 5.2) documenting statistically signicant support for H3 (F 4.00,
p
(one-tailed)
0.025). Lastly, although in the same direction as the results documented
in the main analysis, the results of one-way (auditor rotation) ANOVAs using the
expanding the agenda composite measure and the compromising composite measure
as the dependent variables yield non-statistically signicant results (results not
tabulated)[14].
Discussion and conclusion
This study investigates how auditor rotation impacts the negotiation strategies used
by client management to resolve a nancial reporting issue with the external auditor.
The results of an experiment document that rotation of the audit partner causes client
management to intend to use relatively less contending and more concessionary tactics.
That is, client management intends to be relatively accommodating to the newly
rotated audit partners proposed audit adjustment, consistent with the theory that
initial encounters focus on rapport development. Further, consistent with research on
established rapport, the results support that client management intends to use more
integrative tactics with the non-rotated audit partner as compared to the rotated audit
partner. Likewise, in regard to a moderate distributive negotiation strategy,
compromising, the results indicate that client management intends to use more
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compromising tactics with the non-rotated audit partner as compared to the rotated
audit partner. The consistent pattern of results in these latter two ndings indicates
that established rapport facilitates co-operation to resolve the nancial reporting issue
(rather than accommodation).
These nding suggest mandated partner rotation required by the Sarbanes-Oxley
Act of 2002 Section 203 (US House of Representatives, 2002) and audit rm rotation
advocated by the European Commission (2011) has implications on not only auditor
behaviour and independence, but also the behaviour of client management. Whereas
previous ACM negotiation research has documented the benets of auditor rotation by
examining auditor behaviour (Hateld et al., 2011), this study documents the merits
and costs of auditor rotation by examining client management behaviour in an ACM
negotiation. Specically, client management develops rapport with the newly rotated
auditor by intending to be more concessionary and less contentious
(i.e. accommodating). However, these merits of auditor rotation come at a potential
cost, as client management intends to use relatively more integrative and
compromising tactics when rapport has been established with the non-rotated audit
partner (i.e. co-operative).
There are several limitations to be noted. The study focused exclusively on the
impact of audit partner rotation on a specic audit task ACM negotiation. Policy
decisions related to auditor rotation should consider all other aspects of the audit and,
in addition to the experimental methods strength of causality, be sensitive to absolute
magnitude of effect sizes. Further, the study did not manipulate audit rm rotation, but
rather only manipulated whether the audit partner rotated. Although this provides an
avenue for future research, from an internal validity perspective, this choice in
experimental design was necessary for the current study to control for potential
confounds that would exist when a rm rotates (e.g. large international rm with an
unblemished conservative reputation; relations between the audit staff and the
accounting staff). In addition, the dependent variables used in this study measured the
intended use of negotiation tactics and a notable strength of the studys design
permitted insights into the reliability of the dependent variables (e.g. test-retest
reliability); however, intended use is not necessarily equivalent to the actual use of
negotiation tactics and different behaviours may manifest as negotiations proceed.
Although intended use impacts actual use (Ajzen, 1991), future research may explicitly
examine actual negotiation behaviour. Further, although participants found the case to
be realistic, the data relates to a single case (e.g. inventory overstatement due to clear
cut errors and differences in accounting estimates). Future research may examine
different accounting contexts (e.g. expertise of client management, nature of
misstatements, engagement partners history of negotiation strategies, etc.).
Participants in the study were MBA students with business and managerial
experience. Although these participants are comparable to participant samples used by
prior research (Perreault and Kida, 2011), the participants served as a surrogate for
client-management. Additional analysis yielded evidence that the studys theory
generalized to a different sample of participants that had a greater level of accounting
experience. However, a notable difference between the study and the additional
analysis lies in the intended use of integrative tactics (problem solving and expanding
the agenda). In the study, H3 was supported as it related to expanding the agenda
tactics, but not in regard to problem solving tactics. In contrast, the additional analysis
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found support for H3 as it related to problem solving tactics, but not in regard to
expanding the agenda tactics. Although the ndings in both the study and the
additional analysis support the studys theory that established rapport increases the
likelihood of using integrative tactics, future research on the use of integrative
strategies is warranted.
From an audit quality perspective, examining client managements behaviour and
use of negotiation tactics is critical given that the ACM negotiation occurs in a dyad
where one partys behaviour inuences the other partys response. This study
contributes to the literature by providing timely evidence to inform the debate of the
merits and costs of auditor rotation. Although prior research has questioned the costs
of audit partner rotation (Daugherty et al., 2012), this study documents that auditor
rotation may improve auditors ability to achieve their negotiation outcome by reduced
contentiousness and increased concessionary behaviour by client management.
However, the results of the study also document that, insofar as it is benecial to have
client management intend to use integrative behaviour, there may also be benets from
auditor tenure in an ACM negotiation context.
Notes
1. Previous interactions with the external audit partner were described to be professional and
respectful given that the literature has documented that audit partners with poor
relationships with client management tend to be removed from the engagements
(McCracken et al., 2008; Beattie et al., 2000). The experimental design choice to describe
interactions with the external auditor in the text of the experimental instruments mitigates
potential confounds that may arise during face-to-face interactions. Moreover, the literature
has documented that rapport develops in text/narrative based contexts (Walther, 1992;
Braeutigam, 2006; Green et al., 2004).
2. As will be discussed below and unbeknownst to participants, the purpose of eliciting the
tactics twice was to provide empirical support for the reliability of the adapted dependent
measures.
3. Refer to the participants section below for further details.
4. Participant fatigue is safeguarded by both the passage of real time between parts of the
questionnaire and that Parts C and D together only took the participants on average
approximately 10 minutes to complete. For internal validity purposes, the magnitude and
nature of the 2011 and 2012 misstatements were held constant at the potential cost of
mundane realism (Peecher and Solomon, 2001).
5. The class material dealt with managerial accounting and control systems. During the class
and in the class materials, no reference was made whatsoever to auditors, auditor rotation,
or negotiations.
6. The relatively lower Cronbachs a coefcient for the expanding the agenda tactics (i.e. 0.61
with a test-retest reliability of 0.71) parallels the Cronbachs a reported in McCracken et al.
(2011) (0.67 as per their footnote [13]).
7. The second elicitation of the negotiations strategy questionnaire (i.e. Part B) again yielded
reasonable levels of reliability as evidenced by the Cronbachs a coefcients of 0.78, 0.85,
0.81, 0.73, and 0.61 for the contending, compromising, conceding, problem solving, and
expanding the agenda tactics, respectively.
8. One participant was not able to be present for the second part of the study (i.e. Parts C and D)
and hence is not included in the experimental results. A more stringent approach of
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removing participants who answered each manipulation check incorrectly (rather than using
the sum of the two questions) yields similar results. Further, focusing on only the
39 experimental participants, measures of reliability are similar to those previously reported.
9. Specically, the position level variable is not signicant nor did it interact with the rotation
variable in any of the ve composite measure models (CTDSUM, CEDSUM, COMPSUM,
PSSUM, and EASUM). Examining the 25 negotiation tactics individually, the position level
did not interact with the rotation variable in any of the models. Further, in only two instances
(CED4 and PS3) did the position level main effect approach marginal statistical signicance
( p 0.084 and p 0.074, respectively). In these two instances, the reported rotation results
and inferences remain unchanged, and when considering the number of contrasts, the
occurrence of two marginal instances is far below signicance.
10. Reported p-values for the effects of auditor rotation on client managements compromising
tactics are two-tailed given the non-directional research question.
11. Tabachnick and Fidell (2007, p. 268) note that, Using very highly positively correlated
[dependent variables] in MANOVA is wasteful [. . .] Better strategies are to [. . .] create a
composite score [. . .] for use in ANOVA. Accordingly, the above analyses use a composite
score to investigate the hypothesized differences. Not surprisingly given the highly correlated
negotiation tactics documented previously by the Cronbachs a coefcients and small sample
size, the results of MANOVAs for each negotiation strategy using both Wilks l and
Hotellings t
2
statistics did not detect differences across conditions. Further, we recomputed
the above ANOVAs including in the models a summed covariate of the same tactic based on
the previous administration in Parts A and B. Inclusion of the covariate did not change the
level of signicance for the contending tactics (H1), increased the level of statistical
signicance for the conceding tactics (H2), reduced the level of signicance for the expanding
the agenda tactics (H3), did not change the level of signicance for the problemsolving tactics
(H3), and removed the statistical signicance for the compromising tactics (RQ).
12. The former debrieng question asked whether the participant found the case easy to
understand on an 11-point scale ranging from 25 (strongly disagree) to 5 (strongly
agree) with a midpoint of zero. The mean response of 3.9 (SD 1.1) is statistically
signicantly greater than the scale midpoint (t
65
29.53, p
(two-tailed)
, 0.0001). The latter
debrieng question, which was not elicited in the main study, asked whether the participant
understood the nancial reporting issue (i.e. inventory obsolescence) on an 11-point scale
ranging from25 (did not understand) to 5 (completely understand) with a midpoint of
zero. The mean response of 3.7 (SD 1.1) is statistically signicantly greater than the scale
midpoint (t
65
26.86, p
(two-tailed)
, 0.0001).
13. The former debrieng question asked the participant to describe their nancial reporting or
accounting experience on an 11-point scale ranging from 0 (no experience) to 10
(very extensive experience). The mean response of 5.1 (SD 1.6) for the accounting
practitioner sample is statistically signicantly greater than mean response of 3.3 (SD 1.8) for
the MBA sample (F 26.97, p
(two-tailed)
, 0.0001). The latter debrieng question asked the
participant to indicate how many accounting classes have you taken. The mean response
of 11.2 (SD 4.2) for the accounting practitioner sample is statistically signicantly greater
than mean response of 3.4 (SD 1.8) for the MBA sample (F 119.26, p
(two-tailed)
, 0.0001).
14. The increased statistical power afforded by the larger sample size enhanced the multivariate
analysis. Specically, the results of a one-way (auditor rotation) MANOVA using the ve
contending tactics as dependent variables yielded statistically signicant results (Wilks
l 0.803, F(5,60) 2.95, p
(one-tailed)
0.0095) with three of the ve tactics individually
statistically signicant (CTD1, CTD2 and CTD4). The results of a one-way (auditor rotation)
MANOVA using the ve concessionary tactics as dependent variables yielded marginally
signicant results (Wilks l 0.869, F(5,60) 1.81, p
(one-tailed)
0.0623) with one individual
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tactic statistically signicant (CED4) and another marginally signicant (CED1). The results
of a one-way (auditor rotation) MANOVA using the ve problem solving tactics as
dependent variables yielded non-statistically signicant results (Wilks l 0.901,
F(5,60) 1.32, p
(one-tailed)
0.1345) with two individual tactics statistically signicant
(PS1 and PS4) and another marginally signicant (PS3). The results of one-way (auditor
rotation) MANOVAs using the ve compromising tactics as dependent variables and the
ve expanding the agenda tactics as dependent variables both yielded non-statistically
signicant results (results not tabulated).
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Appendix. Distributive strategies
Contending tactics
CTD1 I would use my inuence to get my position accepted by the auditor.
CTD2 I would argue with the auditor to show them the merits of my position.
CTD3 I would try to use my inuence to re the auditor to obtain a resolution in my favor.
CTD4 I would be rm in pursuing my position.
CTD5 I would use my expertise in the business to inuence the resolution in my favor.
Concessionary tactics
CED1 I would try to satisfy the expectations of the auditor.
CED2 I would try to satisfy the needs of the auditor.
CED3 I would attempt to accommodate the wishes of the auditor.
CED4 I would give into the wishes of the auditor.
CED5 I would make concessions from my position to the auditor.
Compromising tactics
COMP1 I would propose some middle ground on this issue at some point during the process
of resolving the disagreement with the auditor.
COMP2 I would negotiate with the auditor so that a compromise could be reached.
COMP3 I would try to nd some middle ground to resolve this issue with the auditor.
COMP4 I would use give and take so that a compromise could be made with the auditor.
COMP5 I would try to play down the differences with the auditor to reach a compromise.
Integrative strategies
Problem solving tactics
PS1 I would try to bring all my concerns about this issue out into the open with the auditor
so that the issue could be resolved in the best possible way.
PS2 I would try to investigate the issue further with the auditor to nd a new solution
acceptable to both of us.
PS3 I would try to work with the auditor to nd new solutions to this issue that satisfy both
of our expectations.
PS4 I would try to integrate my ideas about how to resolve this issue with the auditor to
come up with a new solution jointly.
PS5 I wouldcollaborate withthe auditor tocome upwithanewsolutionacceptable tobothof us.
Expanding the agenda tactics
EA1 I would bring other issues I have with the audit to the discussion, such that I could
trade off on other issues to resolve this issue in my favor.
EA2 I would try to work with the auditor to develop a proper understanding of this issue in
the context of other issues.
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EA3 I would provide all relevant information to the auditor so we could solve this issue
together in the context of other issues.
EA4 I would attempt to nd other issues with the auditors work, which I could add to the
discussion.
EA5 I would attempt to nd other issues with the audit work, so I could accede to their
wishes at the same time as achieving my position on this issue.
About the authors
Regan N. Schmidt is an Assistant Professor at the University of Saskatchewan. Regan N. Schmidt
is the corresponding author and can be contacted at: schmidt@edwards.usask.ca
Britney E. Cross is a graduate student at the University of Saskatchewan.
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