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

Regan N. Schmidt (Edwards School of Business, University of Saskatchewan, Saskatoon, Canada)
Britney E. Cross (Edwards School of Business, University of Saskatchewan, Saskatoon, Canada)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 3 February 2014

5435

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 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.

Keywords

Acknowledgements

JEL classification – M42. The authors thank Lily Zheng Brooks, Richard Hatfield, 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 financial 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.

Citation

N. Schmidt, R. and E. Cross, B. (2014), "The effects of auditor rotation on client management's negotiation strategies", Managerial Auditing Journal, Vol. 29 No. 2, pp. 110-130. https://doi.org/10.1108/MAJ-03-2013-0836

Publisher

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Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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