Negotiations between auditors and their clients regarding adjustments to the financial statements

While financial statements are the responsibility of management, they are ultimately a product of collaboration between management and their auditors—likely involving negotiations over proposed audit adjustments. This installment of Accounting Matters discusses the implications of prior research in psychology and social psychology regarding negotiations as applied to the context of auditor-client management negotiations. Specifically, we consider recently published research by Hatfield and colleagues regarding how these auditor-client discussions may be influenced in unexpected ways if not viewed through the lens of negotiation. This research finds that explicit consideration of negotiation characteristics (e.g., whether the unaudited financial statement data is the ‘first offer’ of client management, whether negotiations have created reciprocity pressures for the current negotiation) can influence these auditor-client discussions in predictable ways. Understanding the unconscious biases resulting from these ‘negotiation rules’ is key for auditors to effectively translate audit quality into improved financial statement quality.