Resolving Disputed Financial Reporting Issues: Effects of Auditor Negotiation Experience and Engagement Risk on Negotiation Process and Outcome

SUMMARY: In an experiment involving a dyadic negotiation between a computer‐simulated client and practicing auditors, we examine the effects of engagement risk and auditor negotiation experience on the process and outcomes of client‐auditor negotiations. We find that auditors with lower negotiation experience who encounter a high risk client use a more concessionary negotiation strategy, achieve a negotiated outcome that is more aggressive (consistent with the client's aggressive preference), and are less confident that the outcome they negotiate is acceptable under GAAP compared with the negotiation process and outcome results of auditors with higher negotiation experience. In contrast, auditors with higher negotiation experience use a less concessionary strategy, achieve an outcome that is more conservative regardless of risk context, and are more confident that the outcome they negotiate is acceptable under GAAP. This study illustrates the important roles that engagement risk, task‐specific negotiation experience, and pressure from the client regarding an aggressive financial reporting preference play in the process and outcomes of client‐auditor negotiation.