AN EXAMINATION OF AUDITOR NEGOTIATION STRATEGIES

BY

HELEN L. BROWN

BOSTON COLLEGE

ARNIE WRIGHT

NORTHEASTERN UNIVERSITY

April 2008

Acknowledgements: We gratefully appreciate the comments from the participants at the research workshops of Queen’s University and Bentley College and the following individuals: Mohammad Abdolmohammadi; Jean Bedard; Christine Nolder; Steve Salterio; and Regan Schmidt.

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ABSTRACT

Auditors and clients are often required to resolve difficult, complex accounting issues in which they have different views. This resolution essentially entails a negotiation process where research has shown that the strategies employed have dramatic effects on the process, final agreed upon outcome, and the relationship of the parties involved. Despite its importance we have little knowledge concerning the negotiation strategies auditors and clients use and the factors that drive the choice of strategies. This experimental study involving 63 experienced audit managers and partners examines the impact of past relationship with the client (contending or cooperative) and the strength of the audit committee (strong or weak) on auditor pre-negotiation planning judgments and on the use of a strategy during the negotiation process to resolve a difficult, subjective inventory write down issue. The findings indicate that the likelihood of the auditor adopting a preferred position within the client’s negotiation range is lower when the audit committee is strong and the past relationship has been contentious, consistent with our hypotheses that reflect a more contending position by the auditor under such conditions. Also, the auditor’s preferred write down is relatively higher along the client’s range when the audit committee is weak. In the negotiation phase the results indicate auditors provide smaller concessions and a higher final position when the audit committee is strong and the past relationship has been contentious, again supporting our hypotheses. In all, the findings support the importance of contextual factors on auditors’ negotiation judgments and strategies. Key Words: auditor negotiation; negotiation strategy; negotiation relationship; audit committee

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INTRODUCTION

Given the inherent subjectivity of many accounting methods and difficulties of

measurement (e.g., estimates), it is well recognized that the financial statements are the

result of a negotiation or resolution process between the auditor and management (Leavitt

1998; Wright and Wright 1997; Antle and Nalebuff 1991; and DeAngelo 1981). As a

result, there has been a growing body of research concerning the nature of this process

(e.g., Gibbins et al. 2001; Bame-Aldred and Kida 2007) and potential ways to improve

negotiation outcomes (e.g., Trotman et al. 2005; Sanchez et al. 2007). However, there has

been little consideration of contextual or environmental factors (i.e., nature of the issue,

corporate governance, relationship between the auditor and client, etc.) that may affect

the negotiation strategies that auditors and clients choose to use and the extent to which

each reacts to the other’s strategies. Specifically, in this study we examine the impact of

strength of the audit committee (strong or weak) and past relationship with the client

(contending or cooperative) on auditor choice and use of alternative negotiation

strategies. In an auditing context, a prior contending relationship is when in the past the

client has been insistent on his or her position. In contrast, under a cooperative past

relationship the client may begin with a particular position but then is open and willing to

consider counter-arguments and to compromise or concede when deemed appropriate.

Prior positive interactions with a counterpart in a negotiation can produce higher levels of

cooperation as opposed to prior contentious interactions (Perlman and Oskamp, 1966;

McClintock and McNeel, 1967; Michelini 1971, Slusher 1978; Swingle and Gillis, 1986;

Greenhalgh and Chapman, 1998; and Gibbins et al. 2007).

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The audit committee can play a significant role in overseeing the audit process

and helping to mediate disputes between management and the auditor (Sarbanes Oxley

Act 2002, hereafter referred to as SOX). Therefore, a strong audit committee can be

expected to enhance the relative bargaining power of the auditor vis-à-vis management in

a negotiation.

There is a large body of literature that indicates negotiation strategy has a

profound impact on the process, outcome, and relationship of the parties engaged in

resolving an issue (e.g., Bazerman et al. 2000; and Fisher et al. 1981). Thus, it is

important to understand the strategies auditors and clients employ and the factors that

drive the use of various strategies.

To address these issues we employ an experimental study with 63 experienced

audit managers and partners. In the first phase of the experiment, auditors engage in

negotiation planning in response to a case involving a contentious accounting issue where

they consider a position and acceptable range of alternatives, and then anticipate the

strategy and position (range of alternatives) of their client counterpart. In the second

phase auditors engage in up to five rounds of negotiations with a computerized

counterpart employing a relative contending negotiation strategy. Auditors decide

whether to accept the client’s position at each round or offer an alternative position.

We hypothesize that in the pre-negotiation stage auditors will plan to use a more

contending strategy when the audit committee is strong than when it is weak and when

the past client relationship has been contending rather than cooperative. When the audit

committee is strong it is likely the auditor will assess a stronger relative bargaining power

vis-à-vis the client than with a weak audit committee with the audit committee acting as

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an objective intermediary. When the past relationship has been contending, it is expected

the auditor will exercise conservatism (Smith and Kida 1991) and see the need to be

contending to ensure an appropriate resolution is achieved. The findings confirm these

expectations.

The remainder of this paper is divided into four sections. The next section

provides a review of the relevant literature and develops our research hypotheses. This

section is followed by a description of the method and presentation of the results. The

final section is devoted to a discussion of the major findings and their implications for

practice and future research.

BACKGROUND LITERATURE AND HYPOTHESES DEVELOPMENT

Negotiation

Negotiation is a process by which a joint decision is made by two or more parties

with differing preferences and is one in which the outcome ultimately affects the welfare

of both (Murnighan and Bazerman 1990) and possibly third parties, as is the case in

auditing (e.g., users of the financial statements). In general, the parties first verbalize

contradictory demands and then move toward agreement using a variety of possible

negotiation strategies (Pruitt 1981).

The very nature of the audit function often necessitates negotiation between the

auditor and the client. For example, before an auditor is willing to express an unqualified

opinion on a client’s financial statements, any material disputed accounting issues or

disclosures must be resolved. The resolution of these issues may result in a negotiation

between the auditor and the client, where the client is likely to attempt to persuade the

auditor to accept his position and visa versa.

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An emerging line of research examines auditor-client negotiations over complex

financial reporting issues (e.g., Gibbins et al. 2007, 2005; Trotman et al. 2005; Ng and

Tan 2003; Gibbins et al. 2001).1 Research in auditor-client negotiation builds on the

conceptual model developed by Gibbins et al. (2001) which expands the elements of

negotiation examined in prior negotiation research and depicts the negotiation process as

including the accounting issue, the negotiation process, and the resulting accounting

outcome. The importance of accounting contextual features that may affect negotiations

is also highlighted, which are placed into three general categories: the role of external

conditions and constraints; the interpersonal auditor client context; and the capabilities of

the parties. Based on discussions with audit partners, they find that auditor-client

disagreements are frequently negotiated and the outcome is generally material to the

financial statements.

From this model of auditor-client negotiation Gibbins et al. (2005) conduct a

related study where they examine the congruency of auditor and client recalls of

negotiation experiences. They find that auditor-client recalls are largely congruent with

respect to the types of issues negotiated, parties involved in resolving the issue and the

elements of the negotiation process. The results provide insights into the mental models

employed by auditors and clients during the negotiation process and potential reasons that

auditor-client negotiations do not result in an optimal outcome. For example, the study

reports that both auditors and clients view negotiation as a process of persuading the

other party to accept their position, which generally leads to a distributive (i.e., win-lose)

outcome.

1 See Brown and Wright (2008) for a review of this literature.

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The studies conducted by Gibbins et al. (2005, 2001) provide a model of the

auditor-client negotiation process. We extend this work by examining the impact of two

important contextual factors (strength of the audit committee and past relationship with

management) on the choice and use of negotiation strategies. Negotiations have been

generally characterized as a three stage process (Neale and Bazerman 1991): pre-

negotiation planning; negotiations; and outcomes (e.g., nature of the agreement,

commitment). We focus on the first two phases of negotiation. Further, the auditors and

client management in the Gibbins et al. (2005) study recall contentious issues from past

experiences. In considering the types of negotiation strategies that auditors use it is

difficult to generalize from their findings, since the underlying context (the accounting

issue, client situation, negotiation past experience, etc.) vary considerably across these

experiences and is likely to influence the strategy employed. In our study we control for

context, which allows us to learn about the potential strategies employed in response to

contextual factors and an opponent’s strategy.

Additionally, Bame-Aldred and Kida (2006) find that auditors and clients

approach conflict resolution in very different ways. For example, the client participants

were more flexible, more accurately assessed the auditor’s goals and limits and were

more likely to use negotiation tactics where they made concessions or traded off on

various issues than auditors.

While these studies highlight that auditors and clients view negotiations from an

individualistic perspective, they do not address contextual factors that may influence the

negotiation process. While a limited number of studies begin to address this issue (e.g.,

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Gibbins et al. 2005, Brown and Johnstone 2007, Ng and Tan 2003, Gibbins et al. 2001),

little empirical evidence is available.

In the negotiation literature strategy is generally evaluated in terms of the

integrative component (both parties are better off) or in terms of the distributive

component (one party or both ends up with losing some of what would be ideally

desired). A distributive strategy reflects a view that negotiation is a process of dividing

up a fixed set of resources (Neale and Bazerman 1985; Bazerman 1986). One type of

distributive strategy is a contending strategy, in which one party requires the other party

to make concessions, ultimately resulting in a “win-lose” outcome favoring the

contending party. Complementary to the contending strategy is a concessionary strategy,

in which one party concedes to the other, ultimately resulting in a “lose-win” outcome

that does not favor the concessionary party. A cooperative strategy falls between these

two extremes where the person is willing to consider the other individual’s arguments

and will compromise when deemed appropriate.

In contrast to these distributive strategies, an integrative strategy involves jointly

producing a solution where both parties gain at least some benefit (Rahim 1992), i.e., a

“win-win” outcome. While using an integrative strategy is often viewed as superior,

actually achieving integrative outcomes is relatively infrequent (Neale and Bazerman

1991; Kramer and Pommerenke 1993). The final negotiation strategy is avoidance, in

which the parties make little real attempts to resolve the issue (Bazerman and Lewicki

1983). Avoidance is generally not considered an appropriate strategy in auditing where

deadlines require resolution, e.g., SEC requirements for filing the financial statements

and the audit report.

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Few accounting studies specifically examine strategies used by auditors when

negotiating with clients. McCracken et al. (2008) investigate whether generic negotiation

results can be transferred and applied to an auditor-client negotiation setting. They

examine the effect of differences in experience (i.e., audit partners versus audit

managers) level on the intended negotiation strategy and find that managers and partners

are equally likely to plan to use an integrative strategy that employs joint problem

solving. However, partners are less likely to use the integrative strategy of making

mutually beneficial tradeoffs in order to obtain a desired outcome on more significant

issues. Additionally, with respect to distributive strategies, they find that less

experienced audit managers are more likely to use concessionary or compromising

strategies as compared to more experienced partners. Their results demonstrate that the

findings in the general negotiation literature may not be replicated in an accounting and

auditing context.

Theoretical Background and the Development of the Hypotheses

Audit Committee Effectiveness

Professional standards and regulators direct auditors to discuss the quality of

financial reporting alternatives with the audit committee (AICPA SAS 90 2000; Blue

Ribbon Commission 1992), and the passage of Sarbanes-Oxley (2002) has placed an

even greater emphasis on the role and the responsibilities of the audit committee. The

effect of this greater accountability that audit committees now bear is still not clear as it

relates to auditor-client disagreements over financial reporting alternatives. For example,

prior to the passage of Sarbanes-Oxley (“SOX”), there is evidence that auditors viewed

audit committees as typically ineffectual and lacking adequate power to be a strong

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governance mechanism (Cohen et al. 2002). In a follow-up interview study, however,

Cohen et al. (2007) find that post SOX auditors’ experiences with audit committees have

substantially changed with significant improvement in audit committees’ financial

expertise, diligence, and authority. Nonetheless, auditors report that audit committees

continue to be reluctant to be directly involved in mediating an auditor-client dispute,

preferring rather to be informed of the final resolution.

The extent to which the audit committee factors into auditor-client pre-negotiation

and negotiation behaviors is still an empirical question. Practitioners may perceive that

increased accountability and authority post SOX provide audit committees with greater

influence than they have had in the past when confronted with auditor-client disputes.

However, the impact of the audit committee is expected to depend heavily on the

effectiveness of the committee. Drawing on Institutional Theory (Fogarty and Rogers

2005; Gendron et al. 2004; Orton and Weick 1990; Kalbers and Fogarty 1998, 1993), we

focus on audit committee effectiveness in “form” versus “substance”. In form an audit

committee must meet regulatory requirements. For instance, SOX requires AC members

to be independent and financially literate; further, at least one member must be a financial

expert. However, Institutional Theory argues that an audit committee may appear by

outward signs to be effective (in form) yet actually, in substance, not truly be able to

accomplish its responsibilities. For instance, if the audit committee is not granted

sufficient authority and power from the board to confront management on contentious

accounting issues, then it cannot accomplish its objective of achieving high financial

reporting quality.

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Further, when the issues are not clearly defined by GAAP, there is an increased

level of subjectivity and judgment and clients are likely to try to persuade auditors to

accept their position. Therefore, despite the increased responsibilities of the audit

committee post SOX, auditors and clients still appear to be the primary parties engaged in

negotiation to resolve an ambiguous reporting issue.

A more effective audit committee will provide oversight over the negotiation

process and advocate for proper financial reporting. Ng and Tan (2003) find that

auditors’ perceived negotiation outcome is jointly influenced by the availability of

authoritative guidance and the effectiveness of the audit committee. Specifically, when

accounting standards are clear, auditors indicate they believe an adjustment will be

recorded, even if it causes the client to miss analysts’ forecasts, regardless of whether the

audit committee is strong or not. However, when authoritative guidance is lacking,

auditors perceive that the negotiated outcome will result in the client booking an

adjustment when audit committee effectiveness is high but not when it is ineffective.

Their results suggest that audit committee effectiveness is seen as strengthening the

auditor’s position and potentially mitigates suboptimal financial reporting quality.

However, their study was based on auditors’ perceptions of whether an adjustment would

be recorded. They do not directly examine the impact of the audit committee on the

negotiation process and, in particular, the strategies employed.

Studies that have examined audit committees’ interactions with external auditors

have generally found that audit committees tend to be more supportive of the auditor’s

position than management’s position (e.g., DeZoort and Salterio 2001, Knapp 1987).

DeZoort and Salterio (2001) find that audit committee members who are independent and

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who possess audit knowledge are generally more supportive of auditors in an accounting

conflict than they are of management. Knapp (1987) finds that audit committee members

are more likely to support auditors’ disputes with management when audit committee

members are corporate managers, the issue under dispute has objective technical

standards that support the auditor’s position, and the client’s financial condition is weak

rather than strong.

Given these findings auditors’ pre-negotiation and negotiation behavior is likely

to be influenced by their assessment of audit committee effectiveness. A critical

component in auditors’ selection of a negotiation strategy is relative bargaining power

(Gibbins et al. 2003). Research suggests that individuals with power generally use their

power and as a result have better outcomes that the weaker party (Rubin and Brown

1975, Greenhalgh et al. 1985). If the auditor believes that the strength of the audit

committee will bolster (diminish) their bargaining power, this is likely to lead to greater

insistence (lesser insistence) on a particular position. Thus, we expect that:

H1a: Auditors will plan to use a more contending negotiation strategy when the audit committees is strong than when it is weak.

H1b: Auditors will actually use a more contending negotiation strategy when the

audit committees is strong than when it is weak. Past Negotiation Relationship

Auditor-client negotiations are rarely one time occurrences. Research

demonstrates that expectations about an opponent’s behavior matters. Diekmann et al.

(2003) analyzes the effect of expectations on negotiation behavior and find that

participants achieved significantly lower, less favorable outcomes, made more

concessions and were more likely to predict that an agreement would not be reached

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when they expected their opponent to be very competitive as compared to participants

who anticipated a less competitive opponent.

As a result of prior negotiations, both parties form some type of cognitive

representation of how the other party will behave in a negotiation. A particular course of

action taken by a negotiator may be as much a function of the continuing relationship as

the issue at hand. There are three primary aspects to the continuing relationship: previous

bargaining experience between the parties, the current bargaining interaction, and

anticipated future interactions (McGrath 1966). Therefore, an important determinant of

bargaining behavior is the negotiator’s perception of and attributions regarding their

opponent’s behavior (Gruder 1971). Further, Kahan (1968) find that pre-negotiation

expectations may be a determinant of cooperative-competitive strategies.

It is expected that information is an advantage in negotiations because knowledge

about a counterpart’s motivations reduces uncertainty. Therefore, the negotiator can

adjust his/her behavior to expectations about the other party and enhance the likelihood

of coming closer to his/her goal (Schei and Rognes 2003). Extending this premise to the

auditor-client environment, it is likely that auditors prepare for negotiations and select a

negotiation strategy based on previous negotiations with management. For example, if an

auditor’s previous interactions with a member of management were contending, then the

auditor may expect a difficult negotiation and take a strong, contending stand to avoid

having the manager gain an advantage. Further, a manager’s contending strategy poses

greater risks of a potential misstatement(s). Prior research has shown that auditors tend to

follow a conservatism bias when faced with contentious matters (Smith and Kida 1991).

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Thus, we expect auditors to plan and use a contending strategy in anticipation of dealing

with a difficult, contending manager.

Alternatively, auditors facing a contending manager may start the negotiation by

making a small concession to induce the manager to also make concessions. Sanchez et

al. (2007) find that client management is more willing to post significant income-

decreasing adjustments when auditors disclose that they are willing to waive immaterial

audit differences. However, Ng and Tan (2003) report that auditors indicate a reluctance

to use a strategy of beginning with a high position and then later concede, viewing this as

unprofessional.

Finally, auditors may perceive their interests are not aligned with the manager and

adopt a negotiation strategy that results in a win-lose outcome. Thompson and Hastie

(1990) find that most negotiators expect the other party’s interest to be opposed to their

own and thus seek to only maximize their own outcomes. Thus, under this premise, it is

possible that auditors may disregard past negotiation behavior of the manager and focus

only on persuading him or her to accept their current position. Consistent with this, Schei

and Rognes (2003) find that individualists (concerned with maximizing only their own

outcome) obtain poorer outcomes, even when they are informed about their opponent’s

cooperative orientation.

Given the significant risks of dealing with a contending client manager and the

predominant presence of auditor conservatism (Smith and Kida 1991), we posit that past

negotiation experience with a manager will influence the auditor’s planned and actual

negotiation strategy, as indicated in H2. However, our results also allow us to examine

the alternative possibilities noted.

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H2a: Auditors will be more likely to plan to use a contending negotiation strategy when the past relationship with management was contending rather than cooperative.

H2a: Auditors will be more likely to actually use a contending negotiation strategy

when the past relationship with management was contending rather than cooperative.

It is possible that there may be an interactive effect of audit committee effectiveness

and past relationship. For example, when the client has been contentious in past

negotiations and the audit committee has a history of providing oversight over the

negotiation process and advocating proper financial reporting, auditors may adopt a

highly contending strategy. In this situation where the client has been contentious in the

past, auditors may believe that there is a greater risk of a potential misstatement(s) and

adopt a contending strategy, especially when they believe that they have greater

bargaining power given a strong audit committee. Alternatively, when the audit

committee is not very effective and the client has previously been contentious, auditors

may be less contentious and try to reach some level of compromise since they do not

expect any support from the audit committee. Despite these possibilities, we do not offer

specific hypotheses for interactive effects, since there is insufficient research and theory

at this time to hypothesize the potential effects.

METHOD

Participants

We recruited U.S. audit partners and managers to participate in the study. These

are appropriate participants because they are routinely responsible for negotiating with

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clients. Sixty-three2 auditors with prior client-auditor negotiation experience completed

the experiment. Of note, there are 42 audit managers and 21 partners with an average of

7.88 and 18.14 years of auditing experience respectively. Further, managers and partner

participants have sufficient direct task experience in negotiating disputed accounting

matters with a mean of 10.19 and 15.14 times, respectively, in which they resolved a

contentious matter with clients. Auditors came from three of the Big 4 firms with 25, 23,

and 15 participants. Since the issues addressed are broad and not tied to a specific audit

approach, we did not anticipate nor find any significant firm differences in pre-

negotiation judgments or negotiation strategies used (p ≥ .10).

Pre-Negotiation Phase

Overview

The first phase of the experiment examines auditors’ pre-negotiation judgments

(H1a-H2b) using a 2 x 2 factorial between-subjects design. The manipulated independent

variables are strength of the audit committee (strong or weak) and past negotiation

relationship between the auditor and the client (contending or cooperative).

Auditors were randomly assigned to the four experimental conditions. Participants

completed the experimental tasks (described in the next section) on the internet,

providing convenient access given their busy schedules as well as control over the

negotiation strategies of the client counterpart in the second phase (to be described later).

Importantly, there were no significant or marginally significant demographic differences

(p > .10) between the four experimental conditions, suggesting random assignment of

participants was successful.

2 Sixty-four responses were received. However, due to insufficient negotiation task experience one audit senior was excluded.

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Experimental Tasks

Participants received a realistic case adapted from that used by Trotman et al.

(2005). The case is based on an actual client situation in which the audit team questioned

whether the raw material inventory for a joystick manufacturing company should be

written down due to obsolescence given a deteriorating aging and the short product life

cycle in the industry. Thus, the issue at hand is a subjective matter entailing an estimate

of the lower-of-cost-or-market for the inventory account. Such subjective matters often

entail auditor-client negotiations vis-à-vis an objective, clear cut issue such as a material

recording error where little or no negotiation is required.

Background information was provided about the company (industry, history,

overall controls, and summary financial statements) and the issue at hand. There were a

number of risk indicators present in the case. Importantly, the company is planning to go

public in the near future; thus, there are significant pressures to maintain good earnings,

making this a relatively risky client for the auditor. Further, the client has voiced

opposition to an inventory write down. Finally, a number of key performance indicators

indicate the inventory situation is of concern (e.g., slower inventory turnover than from

the prior year and in comparison to competitors). Participants are then asked to provide

judgments in preparation for discussions with the CFO, their counterpart, regarding their

position and that expected of the CFO.

Manipulation of the Independent Variables

As noted, two variables are manipulated: audit committee effectiveness and past

negotiation relationship. Exhibit 1 shows the manipulations. Audit committee

effectiveness is manipulated as either strong or weak. Consistent with Institutional

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Theory, as discussed previously, the strong manipulation entails audit committee

effectiveness “in substance” while the weak manipulations entails audit committee

effectiveness only “in form”. That is, in the strong condition the audit committee is

described as independent, diligent, and knowledgeable in accounting and auditing.

Further, the audit committee has been granted sufficient power from the board to achieve

its objectives, and the board will side with the audit committee in disputes with

management that are contentious. The weak condition is one where the audit committee

meets minimal standards in form, e.g., independent members, one financial expert, and

all financially literate. However, in substance, the committee is weak, since it meets

infrequently, asks few questions, and has limited power from the board. Further, the

board rarely sides with the audit committee when there is a contentious issue involving

management.

The past relationship is either one in which the counterpart has been contending

or cooperative. The contending relationship is where past negotiations have been difficult

and prolonged, since the client CFO has followed a pattern of adopting a position and

then been largely intransient in revising his position in light of counter-arguments. In

contrast, a cooperative strategy is one where the CFO has been willing to accept

reasonable counter arguments.

We pilot tested the instrument with three audit practitioners and three auditing

professors. The instrument was modified to reflect the comments and suggestions

received.

Dependent Variables

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Prior research exploring auditor negotiation strategies has relied on self-reports of

experiences (e.g., Gibbins et al. 2001) and/or expectations of outcomes (e.g., Ng and Tan

2003). These responses are subject to concerns about accuracy of perceptions and self-

insight, common problems in behavioral research (Libby 1981). In contrast, in the current

study we use the auditor’s direct position and assessments about the client’s preferences.

Negotiators’ assessments about their counterparts’ preferences are found to influence

negotiation behavior (Pruitt and Carnevale, 1993). Participants were asked to provide

their assessment of the CFO’s preferred write down and upper and lower range. The

anticipated CFO range characterizes the parameters within which agreement may be

reached. Therefore, the larger the range, the more likely the auditor expects the CFO to

be flexible and therefore may enter the negotiations with a cooperative attitude. We first

examine whether the auditor’s preferred write down is within the auditor estimate of the

CFO’s upper and lower range, IN RANGE. We code this variable 0 if the auditors

preferred write down is not within the clients range, and 1 if it is within the CFO’s

acceptable range. When the auditor’s preferred write down is outside of the CFO’s

acceptable range, it is unlikely that a solution acceptable to both parties will be reached.

In this situation the auditor is likely to enter the negotiation with a contending

disposition. Alternatively, when the auditor’s preferred write down is within the CFO’s

acceptable range, the opportunity exists to reach a conclusion that is satisfactory to both

parties.

Our second measure is a ratio of the auditor’s preferred write down to the

auditor’s assessment of the CFO’s acceptable range (auditor’s preferred write down –

CFO’s lower range/ [CFO upper range – CFO lower range]), NRATIO. A higher ratio

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would suggest that the auditor is less flexible and more likely to enter the negotiation

with a contending attitude, whereas a lower ratio would allow room to find a solution

acceptable to both parties and the auditor would likely be more amenable to making

concessions.3,4 We control for the auditor’s reported beliefs about the strategy they will

use when entering negotiations with the CFO (Reported Strategy). Auditors were asked

to select a negotiation strategy that best described their intended strategy on a 5 point

scale, ranging from concessionary to contending.5

Negotiation Phase

The second phase of the experiment is an extension of the prior phase utilizing the

same participants to control for potential confounding effects such as differences in pre-

negotiation judgments and in task or domain experience. Both phases were designed so

that they could be completed in about 40 minutes over the internet. In the second phase

3 For instance, assume the auditor believes the CFO’s negotiation range is $0 (lower end) to $300 (upper range), and the auditor indicates a preferred write down of $300. NRATIO is 1.00 [(300-0)/300]. This value suggests the auditor is employing a contending strategy with a write down at the high end of the CFO range. Instead, assume the same expected CFO range and an auditor preferred write down of $100. The NRATIO would be .33 [(100-0)/300], indicating a willingness to provide a write down well within the CFO’s acceptable range. This suggests a more concessionary strategy. This assumes the auditor believes some write down is needed (i.e., greater than $0), and is greater than or equal to the CFO’s minimum acceptable write down. Participant responses support these assumptions. 4 To avoid distortions due to extreme values, NRATIO is constrained to a maximum value of 18. For two participants NRATIO takes on very high values, and we, thus, include the next highest value (18) in these cases. We also set NRATIO to the maximum value (18) where the assumed client range is $0 and the auditor’s preferred write down is greater than zero (n = 8). In such cases NRATIO cannot be calculated and the auditor’s position indicates a very strong contending strategy.

5 Auditors responses were based on a five point scale where the strategies range on a scale from highly concessionary to highly contending, as follows: 1= concessionary (I would accept the CFO’s position); 2= compromising (I would work to arrive at a compromise halfway between that proposed by the audit staff and by the CFO); 3= integrative (I would consider additional options) 4 = strictly compromising (I would listen to the CFO’s arguments and accept a reasonable compromise between that proposed by the audit staff and by the CFO); and 5= contending (I would insist on an inventory write down that the audit staff proposed).

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auditors were engaged in negotiations with a computerized-counterpart (the CFO). If a

participant accepts the position of the counterpart, agreement is reached and negotiations

are ended. Unbeknownst to participants there were a maximum of five negotiation rounds

to reach agreement. If no agreement is obtained at that time, participants were asked what

actions they would take at this point. In each round the participant can accept the CFO’s

position or provide a counter-position. They were also asked to provide an explanation to

the CFO for their counter-position.

The strategy of the CFO was held constant and reflected a relatively contending

one. That is, the CFO proposed a write down of $150,000 in negotiation rounds 1-3,

$175,000 in round 4 and $200,000 in round 5. Thus, the CFO gives little ground over the

course of the negotiations, should negotiations continue. Such a strategy by the client is

of highest risk and difficulty for the auditor, since this represents greater client pressures

on the auditor to acquiesce. Such a setting is also of greatest risk to investors, who rely on

the auditors to deter the client from engaging in inappropriate behavior.

Dependent Variables

Our first variable that reflects the actual strategy pursued by the auditor is the

monetary concessions made during the negotiation, i.e., [(auditors preferred write down -

final offer) CONCESSION. Our second variable is the FINAL OFFER, which is the

alternative the auditor was willing to agree to in the final round of the negotiation. Lower

final offers indicate that the auditor is willing to accept a lower write down and more

aggressive CFO position.

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Control variables

In our CONCESSIONS model, we control for the auditor’s solution set, i.e., the

difference between what they believe the appropriate write down is less the lowest write

down they will accept. It seems logical that the concessions the auditor is willing to

make will be constrained within this solution set. We also control for the auditor’s limit,

LIMIT which represents the lowest write down the auditor is willing to accept in both the

CONCESSIONS and FINAL OFFER models. Research finds higher limits produce higher

initial demands and lower concession making (Kelley et al. 1967, Yukl 1974) and to

lower and fewer agreements (Ben-Yoav and Pruitt 1984, Neale and Bazerman 1985,

Pruitt and Lewis 1975).

RESULTS

Manipulation Checks

We employed two manipulation check questions to determine whether

participants encoded the experimental conditions as intended. The first question asked:

“In the case you just completed how strong do you think the audit committee at VCC is

in helping to resolve contentious accounting issues?” Responses were on a scale from

one (very weak) to seven (very strong). “The mean (standard deviation) responses were

3.10 (1.47) and 5.21 (1.01) for auditors in the weak audit committee and the strong audit

committee conditions, respectively. The difference in means is significant (t = 6.652, p =

0.000). The second question stated: “What do you think best describes the past

relationship you have had with the CFO in his approach to dealing with difficult

accounting issues?” Responses were on a scale from one (cooperative) to seven

(contending). The mean (standard deviation) responses were 3.19 (1.62) and 5.64 (1.41)

21

for auditors in the cooperative client and the contending client conditions, respectively.

The difference in means is significant (t = -6.44, p = 0.000). The difference in means for

both questions indicates successful experimental manipulations.

Results of the Pre-negotiation Phase

The results in Table 1 provide analyses to test H1a-H2b. We investigate whether

pre-negotiation judgments will be more reflective of a contending strategy when the audit

committee is strong than weak (H1a) and when the past negotiation relationship has been

contending than cooperative (H2b). We use LOGIT and ANCOVA models to test our

hypotheses, with the dependent variables IN RANGE and NRATIO providing measures of

pre-negotiation strategies6.

For IN RANGE we use a LOGIT model (Panel A of Table 1) and find the

coefficient on AUDIT COMMITTEE statistically significant (p = 0.048) and the

coefficient on PAST RELATIONSHIP negative and statistically significant ( p = 0.015).

Panel C of Table 1 shows descriptive statistics for each of the experimental conditions.

As indicated, auditors are more likely to take a position (preferred write down) within the

CFO’s range, suggesting a compromising negotiation strategy, when the audit committee

is weak (mean= 0.533) than strong (mean= 0.333) [p= 0.056] and when the CFO has

been cooperative (mean= 0.567) than contending (mean= 0.303) [p= 0.017]. These results

provide support for H1a and H2a.

For NRATIO we use an ANCOVA (Panel B of Table 1) and find a significant

main effect of AUDIT COMMITTEE only (F = 3.279, p = 0.0375). The ratio is higher

when the audit committee is strong (mean=7.07) than when it is weak (mean= 3.82

[p=0.047]), suggesting a more contending strategy. This finding supports H1a. We do not 6 The two dependent variables are not significantly correlated (-0.153, p =0.230).

22

find an interactive effect of AUDIT COMMITTEE X PAST RELATIONSHIP in the pre-

negotiation phase.

The results for the two dependent variables examined are generally supportive of

H1a and H2a (i.e., IN RANGE, and NRATIO). When the CFO’s preference is factored

into the pre negotiation assessments (i.e., IN RANGE and NRATIO) auditors are more

contending when the audit committee is strong and the past CFO relationship has been

contentious.

Results of the Negotiation Phase

Results in Table 2 provide analyses for H1b and H2b. We investigate how audit

committee effectiveness and past negotiation relationship impact the negotiation strategy

actually used during the negotiation process. Analysis of the negotiation rounds reveal

that approximately 75% of participants did not reach an agreement at the end of the 5th

round, opting instead to take further action (e.g., take the matter to the audit committee).

Because of the significant correlation among the dependent measures in our analysis

(r=.344, p=0.006), we initially use a MANCOVA with the dependent variables

CONCESSION and FINAL OFFER measuring the negotiated strategy employed.

The MANCOVA results revealed a significant main effect for PAST

RELATIONSHIP (p <.05) and a significant interactive effect of AUDIT COMMITTTEE x

PAST RELATIONSHIP (p = 0.05). Given the significant effects of the MANCOVA,

individual ANCOVAs were conducted for each of the dependent variables to test the

hypotheses. Table 2, Panel A shows the results of these analyses. With regard to

CONCESSIONS, PAST RELATIONSHIP is found to be significant (F=3.207; p= .015)

23

and the interaction between AUDIT COMMITTEE and PAST RELATIONSHIP is

marginally significant (F=2.212; p=.071).

As shown in panel B of Table 2, the lowest CONCESSIONS occur when the past

negotiation relationship was contentious (mean = $-1,121) as compared to a cooperative

past relationship (mean = $121,467) [p = 0.034], especially when the audit committee is

strong (mean= -$41,225). Past relationship appears to drive the auditor’s decision

regarding concessions since a cooperative past relationship results in the greatest amount

of concessions. Perhaps in situations where the client seems to be flexible, the auditor is

willing to work with the client to arrive at a solution acceptable to both parties. It is

important to note that while auditors were willing to make concessions, they still engaged

in a largely contending strategy in that they moved very little from their goal or preferred

write down (mean $57,254). As noted above, most auditors did not reach agreement with

the client. The findings on CONCESSIONS support H1b and H2b.

With respect to negotiation FINAL OFFER there is a significant interaction of

AUDIT COMMITTEE X PAST RELATIONSHIP (F = 5.846, p = 0.009), a significant

main effect of PAST RELATIONSHIP (F = 6.607, p = 0.006) and a marginally significant

main effect of AUDIT COMMITTEE (F = 1.872, p = 0.08). Again the results suggest that

audit committee strength and past relationship influence auditor negotiation decisions. As

shown in panel B, the mean FINAL OFFER is highest in the strong audit committee, past

contentious condition ($773,706) and lowest in the weak audit committee, past

cooperative condition ($525,714), again providing support for H1b and H2b.

Our overall conclusions are that past relationship and audit committee strength

affect the negotiation strategy used by the auditor. When the audit committee is strong,

24

auditors are likely to regard this as bolstering their bargaining power and they take on a

more contending stance in negotiations. This is especially evident when the CFO has

been contentious in the past. In this situation, the auditor makes no concessions and

insists on the highest write down. Further, only 3 of 17 auditors in the strong audit

committee, contending condition were able to reach agreement with the CFO.

Additional Findings

We also examine a second measure reflective of the negotiation strategy used,

implied by the difference between the auditor’s preferred write down prior to starting the

negotiation and the final offer. There are three strategies implied by the pattern of

auditors’ most preferred write down and final offers: a contending strategy, a

compromising strategy, and a conceding strategy. We infer a contending strategy when

the auditor refuses to yield to the client’s preference (e.g., the auditor’s most preferred

write down and the final offer are the same, or the final offer is higher than the auditor’s

preferred write down).

We infer the compromising and conceding strategies by considering the dollar

amount if the auditor and client “split the difference” (Neale & Bazerman 1985; Kramer

& Pommerenke 1993) between their respective pre-negotiation preferences. In our case,

“splitting the difference” is calculated as the difference between the client’s initial

preference (say, $150,000) and the auditor’s preferred write down (say, $600,000)

divided by 2. We infer a conceding strategy when the auditor’s concessions are greater

than the “splitting the difference” amount ($600,000-$150,000/2=$225,000). We infer a

compromising strategy for all the other bidding patterns since the dollar amounts

associated with this strategy fall between those associated with the contending and

25

conceding strategies. In our example, we infer a conceding strategy when the final offer

is $250,000 (a concession of $350,000 below the auditor’s preferred choice of $600,000);

we infer a compromising strategy when the final offer is $500,000 (a concession of

$100,000).

During the pre negotiation phase only 16% of auditors reported in an objective

choice question (Reported Strategy) that they plan to use a contending strategy.

However, using the implied strategy measure described above we find that during actual

negotiations with the client 44% of auditors actually appeared to use a contending

strategy (Table 3), which represents a significant shift in strategy (t = -4.528, p =0.000).

This result may be driven by findings that indicate auditors generally perceive themselves

to be compromising and/or integrative when resolving issues with clients (Brown and

Johnstone 2007, Goodwin 2002). However, when put in a context where they have to

consider the client’s expectations and preferences they generally view the negotiation

from a distributive perspective, i.e., persuading the other party (Gibbins et al 2005,

Brown and Johnstone 2007).

We also examine auditors’ subsequent actions and how audit committees are

likely utilized in negotiation situations when auditors and clients disagree about an issue.

We asked participants to indicate in an open ended question the action they would take if

they were not able to reach an agreement at the end of the five rounds. Forty-seven

participants did not reach agreement by round 5 of the negotiation. We coded their

responses into five categories: request more information from the CFO (1); meet with the

CEO (2); go to the audit committee (3); discuss the issue with other partners in the audit

firm (4); or take other actions (5). We independently coded participant responses using

26

this qualitative scale. The inter-rater agreement was 85%, indicating a high level of

agreement. All differences were subsequently reconciled.

Overall, the results suggest that when the audit committee is weak, auditors try to

resolve the issue with management. Specifically, we find that in the weak audit

committee condition, 4 of the 19 auditors (21%) indicated that they would take the matter

to the audit committee as compared to 10 of 27 auditors (37%) in the strong audit

committee condition.7 We further collapsed responses into a 1 (continue to work with

management to resolve the issue; actions 1 and 2, above) and 2 (end discussions with

management and go to other third parties; actions 3, 4, and 5, above). Of the 46 auditors,

18 of 27 auditors (67%) in the strong audit committee condition indicated that they would

terminate discussions with the client as compared to 7 of 19 auditors (37%) in the weak

audit committee condition8. Again, the results seem to suggest that when the audit

committee is weak, auditors will try to resolve the issue with management and not

involve the audit committee or other partners.

CONCLUSIONS

Auditors and clients must often resolve difficult, complex accounting and

disclosure issues. Thus, it is important to examine factors that drive the judgments and

strategies that are employed in this process, since the quality of financial reporting is

directly impacted. Drawing on the auditing and negotiations literature, we use a

controlled experiment to examine the impact of two contextual factors [the auditor-CFO

past relationship (cooperative or contending) and the strength of the audit committee

7 Chi-square results indicate no significant differences (5.229, p = 0.265), likely due to the small cell sizes in each condition. Additionally, chi-square results for past relationship is also insignificant (.063, p = 0.801). 8 Chi-square results indicate significant differences (3.998, p = 0.046). We find no significance for past relationship (0.122, p = 0.727).

27

(strong or weak)] on auditors’ pre-negotiation planning judgments and on the strategy

employed during the negotiation process. We expect auditors to be more contending

when the audit committee is strong and when the past CFO relationship has been

contending.

In the pre-negotiations planning phase the results indicate the auditor’s preferred

position is less likely to be within the CFO’s range when the audit committee is strong

and the CFO has been contentious in the past. This finding is consistent with our

hypotheses. Further, the relative position of the auditor’s preferred position within the

CFO’s range is also at a higher level (contending) when the audit committee is strong,

supportive of our hypothesis.

The findings regarding the strategy auditors used during the negotiation process

suggest auditors are more likely to use a contending strategy when the audit committee is

strong and the past negotiation relationship has been contentious, while a compromising

strategy is more prevalent when the audit committee is weak and the past relationship has

been cooperative. That is, the lowest auditor concession and highest final offer occurs

when the audit committee is strong and the past relationship was contentious. These

results are consistent with our expectations.

In all, the findings suggest a significant impact of audit committee strength and

past relationship on pre-negotiation planning judgments and the choice of a negotiation

strategy to employ to resolve a contentious accounting issue, highlighting the importance

of these contextual factors. The results corroborate the importance of a strong audit

committee in enhancing the relative bargaining position of the auditor, providing further

support for the provisions of the Sarbanes-Oxley Act that seek to strengthen the

28

responsibilities, expertise, and authority of the audit committee. However, at the same

time the results also underscore the difficulties auditors face when dealing with a client

that has a weak audit committee in resolving contentious accounting issues. This situation

raises the important practice and research issue of considering the efficacy of other

contextual factors in such circumstances that may compensate for a weak audit

committee such as a strong second partner review or a powerful, independent board of

directors.

The findings also highlight the importance of the past relationship with a client

counterpart. Noteworthy is that auditors are found to be more vigilant when facing a

contentious CFO, which appears appropriate to address greater risks of a potential

misstatement(s). However, auditors must be cautious in not responding to a cooperative

CFO by, in turn, becoming too concessionary. In our experiment the CFO adopted a

relative contending negotiation strategy. It would be insightful to extend this work by

also examining the extent to which auditors alter their negotiation strategy in the presence

of a cooperative, more flexible client counterpart.

We also provide a context where the client inherent risks are moderately high and

where the auditor and client are called upon to resolve a subjective accounting issue.

Future research that examines the extent to which auditors are (and should be) adaptive in

the choice of negotiation strategies to reflect variations in these and other contextual

factors is promising. Further, our study focuses on the pre-negotiations and negotiations

phases, which can be extended to also examine the impact of contextual factors on

negotiation outcomes. Finally, the current study examines a single period negotiation

whereas negotiations between auditors and management are usually of a continuing,

29

multi-period nature. While we recognize this contextual feature in the audit environment

when examining the impact of past relationship, we do not investigate how negotiation

strategies may evolve over multiple periods, another fruitful issue for future research.

30

TABLE 1 Panel A. LOGIT Analysis of Pre-Negotiation Strategies (IN RANGE) Variable

Coefficient Wald Chi-Square

Audit Committee 0.911 2.771** Past Relationship -1.193 4.698*** Control Variable: Reported Strategy

-0.140

0.115

Panel B. ANCOVA Analysis of Pre-Negotiation Strategies (NRATIO)

Variable

DV=NRATIO

Audit Committee 140.73 3.279**

Past Relationship

15.68 0.365

Audit Committee X Past Negotiation Relationship

26.09 0.608

Control Variable: Reported Strategy

115.23 2.685**

Panel C. Descriptive Statistics Past Negotiation Relationship Cooperative Contentious Total

Weak N = 14

IN RANGE = 0.714 (0.469)

NRATIO = 3.631 (5.017)

N = 16

IN RANGE = 0.375 (0.500)

NRATIO = 4.437 (5.74)

N = 30

IN RANGE = 0.533 (0.507)

NRATIO = 4.061 (5.339) Audit Committee

Effectiveness Strong

N = 16

IN RANGE = 0.437 (0.512)

NRATIO = 7.965 (8.088)

N = 17

IN RANGE = 0.235 (0.437)

NRATIO = 5.716 (7.08)

N = 33

IN RANGE = 0.333 (0.479)

NRATIO = 6.810 (7.551)

Total N = 30

IN RANGE = 0.567 (0.504)

NRATIO = 5.943 (7.068)

N = 33

IN RANGE = 0.303 (0.467)

NRATIO = 5.096 (6.398)

N = 63

IN RANGE = 0.4286 (0.499)

NRATIO = 5.499 (6.683) Notes to tables:

1. Values in cells represent the mean square and F-value. ***, **, and * represent significance at the 0.01, 0.05, 0.10 level, respectively. Reported probabilities are one-tailed for the directional expectations in the hypothesis tests.

2. IN RANGE= Auditor preferred choice within client bargaining range (no=0; yes=1); NRATIO = auditor’s preferred write down – client’s lower range / [$difference of the upper and lower ranges of the client’s acceptable write down based on the auditor’s assessment]. AUDIT COMMITTEE = 1 for the weak audit committee manipulation, = 0 for the strong audit committee manipulation. PAST RELATIONSHIP = 1 for the contentious past relationship manipulation, = 0 for the cooperative past relationship

31

manipulation. Reported Strategy= auditor’s description of the strategy they are most likely to use during negotiations with the client: 5 point scale: 1=concessionary, 2=compromising, 3=integrative, 4=strictly compromising, and 5=contending.

3. Descriptive data represent the mean (standard deviation). PREFERRED WRITEDOWN= $ of auditor’s preferred write down prior to negotiation.

32

TABLE 2

Analyses of Strategy Used During the Negotiation Process

Panel A: ANCOVA Results Variable

DV= CONCESSIONS DV= FINAL OFFER

Audit Committee 4.863 0.741

1.387 1.872*

Past Relationship

3.206 4.881***

4.897 6.607***

Audit Committee X Past Negotiation Relationship

1.453 2. 212*

4.334 5.846***

Control Variables: SOLUTION SET 3.687

5.614***

LIMIT 1.488 0.227

1.409 190.05***

Panel B. Descriptive Statistics

Past Negotiation Relationship Cooperative Contentious Total

Weak

N = 14 CONCESSIONS =$105,142 ($137,261) FINAL OFFER = $525,714 ($433,513)

N = 16 CONCESSIONS =$41,500 ($216,438) FINAL OFFER = $705,750 ($639,140)

N = 30 CONCESSIONS =$-71,200 ($184,617) FINAL OFFER = $621,733 ($551,257) Audit

Committee Effectiveness

Strong

N = 16 CONCESSIONS =$135,750 ($323,500) FINAL OFFER = $669,250 ($580,107)

N = 17 CONCESSIONS =$-41,235 ($-315,918) FINAL OFFER = $773,706 ($545,952)

N = 33 CONCESSIONS =$-44,575 ($327,148) FINAL OFFER = $723,060 ($556,405)

Total

N = 30 CONCESSIONS =$-121,467 ($251,360) FINAL OFFER = $602,267 ($513,434)

N = 33 CONCESSIONS =$1,121 ($271,337) FINAL OFFER = $740,758 ($584,555)

N = 63 CONCESSIONS =$-57,253 ($267,135) FINAL OFFER = $674,810 ($551,841)

33

Notes to table: 1. Values in cells represent the mean square and F-value. ***, **, and * represent significance at the 0.01, 0.05, 0.10 level, respectively. Reported probabilities are one-tailed for the directional expectations in the hypothesis tests. 2. CONCESSIONS = [($preferred write down-$final offer)]. FINAL OFFER = $ of final alternative to which auditor proposed in final round. PREFFERED WRITEDOWN = $ of auditor’s preferred write down prior to negotiation. 3. AUDIT COMMITTEE = 1 for the weak audit committee manipulation, = 0 for the strong audit committee manipulation. PAST RELATIONSHIP = 1 for the contentious past relationship manipulation, = 0 for the cooperative past relationship manipulation. 4. SOLUTION SET = difference between the auditor’s preferred write down and the auditor’s limit. LIMIT = the lowest write down the auditor is willing to accept.

1

Table 3

Frequencies: Auditor’s Pre-Negotiation and Negotiation Strategies

Pre-Negotiation Phase (Experiment 1) Negotiation Phase (Experiment 2)

Past Negotiation Relationship Past Negotiation Relationship Cooperative Contentious Total Cooperative Contentious Total Strategy Frequency

(Number)

Strategy Frequency

(Number)

Frequency

(Number)

Strategy Frequency

(Number)

Strategy Frequency

(Number)

Frequency

(Number)

Audit Committee

Effectiveness Weak

N = 14

Contend

Other

14% (2)

86% (12)

N = 16

Contend

Other

19% (3)

81% (13)

N = 30

17% (5)

835% (25)

N = 14

Contend

Other

43% (6)

57% (8)

N = 16

Contend

Other

37% (6)

63% (10)

N = 30

40% (12)

60% (18)

Strong

N = 16

Contend

Other

19% (3)

81% (13)

N = 17

Contend

Other

12% (2)

88% (15)

N = 33

15% (5)

85% (28)

N = 16

Contend

Other

44% (7)

56% (9)

N = 17

Contend

Other

53% (9)

47% (8)

N = 33

48% (16)

52% ( 17)

Total

N = 30

Contend

Other

17% (5)

83% (25

N = 33

Contend

Other

15% (5)

85% (28)

N=63

16% (10)

84% (53))

N = 30

Contend

Other

43% (13)

57% (17)

N = 33

Contend

Other

45% (15)

55% (18)

N=63

44% (28)

56% (35)

Notes to Table:

1. Strategies in the pre-negotiation phase are determined based on auditor’s self reported planned strategy based on an objective choice question. Strategies in the negotiation phase are based on that implied by the difference between the auditor’s preferred write down prior to starting the negotiation and the final offer.

2. Strategies included in the “other” category are compromising, integrative and concessionary.

1

EXHIBIT 1 Manipulation of Independent Variables

Audit Committee Effectiveness (labeled as “Corporate Governance” in instrument):

Strong Audit Committee Manipulation:

VCC has a board of directors of nine members, three from management (including the president) and six independent, outside individuals. The audit committee is composed of three individuals, who are all independent. Two of the members have extensive experience in public accounting and the third member is financially literate. You have been very impressed with the audit committee’s high level of diligence in representing shareholders’ interests. They ask many probing questions and meet very frequently. Finally, the board has granted the audit committee a high level of power in executing its authority and almost always sides with the audit committee on contentious issues involving management. Weak Audit Committee Manipulation: VCC has a board of directors of nine members, three from management (including the president) and six independent, outside individuals. The audit committee is composed of three individuals, who are all independent. One of the members is a CPA and has 5 years of experience in public accounting. The other two members are financially literate. Your experience with the audit committee is that they ask very few questions and meet two times a year. Finally, the board has granted the audit committee limited power in executing its authority and very rarely will the board side with the audit committee on contentious issues involving management. Past Negotiation Relationship:

Contending Relationship Manipulation: In the past you have had a difficult relationship with the CFO in resolving difficult issues. The CFO tends to stick to his position and be intransient, failing to listen to counter arguments. As a result, interactions involving contentious issues have been prolonged and difficult.

Cooperative Relationship Manipulation:

In the past you have had a cooperative relationship with the CFO in resolving difficult issues. He has been willing to accept reasonable counter arguments. As a result, interactions involving contentious issues have not been prolonged or difficult.

2

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