TY - JOUR
T1 - The effects of performance-based profit-sharing schemes and client pressure on auditors' pre-negotiation judgments
AU - Das, Abhijit
AU - Chong, Vincent K.
AU - Masschelein, Stijn
AU - Wang, Isabel Z.
AU - Woodliff, David R.
N1 - Publisher Copyright:
© 2024 The Authors
PY - 2024/9/19
Y1 - 2024/9/19
N2 - Prior studies in auditing have examined the impact of performance-based profit-sharing schemes (PES) and client pressure in terms of explicit pressure and implicit pressure on auditors' judgments independently, and there is an ex-ante expectation that these two factors will interact in the context of proposed audit adjustments in a prenegotiation setting. Based on the theory of motivated reasoning, this study examines whether explicit pressure by clients will have a smaller effect when auditors' PES is based on a firm-wide scheme as compared to a divisional scheme. We conduct a 2 × 2 between-subject experiment with 95 experienced auditors, predominantly audit managers from the US, that examines how performance-based profit-sharing schemes (i.e., firm-wide vs. divisional) of audit partners and client pressure (i.e., explicit vs. implicit) affect auditors' mindsets on the magnitude of provision for obsolete inventory to be reported in the client's financial statements in an auditor-client pre-negotiation setting. The findings show that auditors' PES and client pressure interact to affect auditors' behaviour in a pre-negotiation setting. Our results exhibit the concessionary (i.e., waiving a material audit adjustment) behaviour of audit partners, directors, and managers from the US. The findings extend contemporary research on auditor-client negotiation by providing evidence to the literature that PES schemes influence the behaviour of auditors in a pre-negotiation setting.
AB - Prior studies in auditing have examined the impact of performance-based profit-sharing schemes (PES) and client pressure in terms of explicit pressure and implicit pressure on auditors' judgments independently, and there is an ex-ante expectation that these two factors will interact in the context of proposed audit adjustments in a prenegotiation setting. Based on the theory of motivated reasoning, this study examines whether explicit pressure by clients will have a smaller effect when auditors' PES is based on a firm-wide scheme as compared to a divisional scheme. We conduct a 2 × 2 between-subject experiment with 95 experienced auditors, predominantly audit managers from the US, that examines how performance-based profit-sharing schemes (i.e., firm-wide vs. divisional) of audit partners and client pressure (i.e., explicit vs. implicit) affect auditors' mindsets on the magnitude of provision for obsolete inventory to be reported in the client's financial statements in an auditor-client pre-negotiation setting. The findings show that auditors' PES and client pressure interact to affect auditors' behaviour in a pre-negotiation setting. Our results exhibit the concessionary (i.e., waiving a material audit adjustment) behaviour of audit partners, directors, and managers from the US. The findings extend contemporary research on auditor-client negotiation by providing evidence to the literature that PES schemes influence the behaviour of auditors in a pre-negotiation setting.
KW - Auditor-client negotiation
KW - Auditors' pre-negotiation judgments
KW - Client pressure
KW - Performance-based profitsharing schemes
KW - Theory of motivated reasoning
UR - http://www.scopus.com/inward/record.url?scp=85204380746&partnerID=8YFLogxK
U2 - 10.1016/j.adiac.2024.100781
DO - 10.1016/j.adiac.2024.100781
M3 - Article
AN - SCOPUS:85204380746
SN - 0882-6110
JO - Advances in Accounting
JF - Advances in Accounting
M1 - 100781
ER -