An agreement between auditor and client is an essential document used to ensure a clear understanding of the audit scope and objectives, responsibilities of each party, fees and billing arrangements, confidentiality and data protection provisions, and more. It is commonly agreed upon by both parties during an initial meeting and is drafted and sent to the client. This helps avoid misunderstandings and keeps the audit within predetermined boundaries.
The ability of the auditor to build cooperative working relationships with clients while maintaining independence has been a key challenge in the practice. Prior studies indicate that clients want to maintain a trusting relationship with their auditors, but at the same time desire to remain at arm’s length from them. This conflict between wanting to stay close and remaining independent has been blamed for many instances of auditors acquiescing to the requests of their clients.
In this article we use a unique research design to examine how auditors and their clients approach the negotiation process and make decision-making choices. We test whether the negotiation context has an impact on the flexibility and accuracy of decision-making by both parties. We also examine whether the level of agreement between the parties affects the way in which they resolve disagreements and negotiate terms and conditions of an audit engagement. Our results suggest that, under our study’s conditions, clients are more flexible than auditors in their negotiation decisions. They are more likely to adopt negotiating tactics such as bid high/concede later and trade-off one issue for another. Auditors, on the other hand, exhibited a more conservative approach to negotiation and were less likely to utilize negotiation tactics that could increase their profitability.