Accounting estimates are highly subjective and multiple estimation alternatives often exist for a single account. When addressing audit-related adjustments with clients, auditors must decide whether to discuss all possible estimation alternatives or approach the client with only a single, auditor-preferred estimation alternative. In an experiment with experienced CFOs and controllers, we find clients with relatively higher status (operationalized as those with a CPA license) take more aggressive financial reporting positions when the auditor approaches the client with multiple adjustment options based on various estimation alternatives. Our study provides the first evidence that client status is a significant factor in auditor-client negotiations. We also demonstrate how auditors' approach to client negotiations involving multiple allowable estimation alternatives can influence audit quality.
The Effects of Client Status and the Auditor's Presentation of Multiple Estimation Alternatives on Client Financial Reporting Aggressiveness
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Sanaz Aghazadeh, Andrew M. Collins, Chad M. Stefaniak; The Effects of Client Status and the Auditor's Presentation of Multiple Estimation Alternatives on Client Financial Reporting Aggressiveness. Behavioral Research in Accounting doi: https://doi.org/10.2308/bria-19-025
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