Auditor-Client Negotiations of Adjustments to Financial Statements
Fisher, Marguerite Halder
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https://hdl.handle.net/2142/71390
Description
Title
Auditor-Client Negotiations of Adjustments to Financial Statements
Author(s)
Fisher, Marguerite Halder
Issue Date
1984
Department of Study
Accountancy
Discipline
Accountancy
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Accounting
Abstract
This research studied how auditors assess and deal with apparent or real disagreements with clients as to whether a set of financial statements is materially misstated and needs to be adjusted.
A structured framework was developed. The framework--a specific two-person auditor-client bargaining game under conditions of incomplete information--assumes that a bargaining model of behavior can be combined with economic theory, cognitive psychology, and the professional auditing literature to provide insights into auditor and client preferences, attitudes, and behavior. Practitioner perceptions of how two environmental variables might affect the auditor's bargaining position were analyzed within this framework and developed into two testable hypotheses.
Framework and hypotheses were then used to design a laboratory experiment. Three variables were manipulated--strength of the client's financial condition, type of error discovered by the auditor, and order of cases received by the participant. Twenty experienced auditors played two one-period interactive audit games with the computer-simulated management of a company which had not adjusted its financial statements for amounts which had been proposed by the audit staff. Four dependent variables--the amount of the auditor's final proposal for adjustment, the first proposal, the concession made between the first and final proposals, and the difference between the final proposal and an amount the participant said would have been proposed if the client had offered no resistance--were used with a split-plot Analysis of Variance to test for significant differences in dependent variables between levels of the manipulated variables.
The research findings were mixed but generally did not support the expectations of differences. The null hypothesis about case order was rejected at (alpha) < 0.05 using the third dependent variable, and the null hypothesis about an interaction between financial condition and error type was rejected at (alpha) < 0.01 using the fourth dependent variable. None of the other results were significant at (alpha) < 0.05. However, the experiment supported the appropriateness of a bargaining model, identified some apparently anomalous behavior and some possibly sub-optimal behavior for follow-up research, and provided information which can be used to refine the model and design further experiments.
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