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A Bargaining Model of Auditor Reporting

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  • PING ZHANG

Abstract

In this paper, I demonstrate that the quasi†rents earned in audits undermine an auditor's independence By considering the incentives of the auditor and the client and the interaction between them, I conclude that auditor will maintain his or her independence if the firm†specific quasi†rents are zero, but compromise his or her independence if the quasi†rents are positive. The extent of the compromise is an increasing function of the quasi†rents, since the auditor will propose that a higher value be reported in the financial statements when the quasi†rents increase. I also show that disputes between the auditor and the client increase as the scope for errors for an auditor's test increases. When the error scope is large, the client becomes more aggressive in preparing a proposal while the auditor becomes more cautious.

Suggested Citation

  • Ping Zhang, 1999. "A Bargaining Model of Auditor Reporting," Contemporary Accounting Research, John Wiley & Sons, vol. 16(1), pages 167-184, March.
    • Handle: RePEc:wly:coacre:v:16:y:1999:i:1:p:167-184
    DOI: 10.1111/j.1911-3846.1999.tb00578.x
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    References listed on IDEAS

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    1. Titman, Sheridan & Trueman, Brett, 1986. "Information quality and the valuation of new issues," Journal of Accounting and Economics, Elsevier, vol. 8(2), pages 159-172, June.
    2. Dye, Ronald A., 1991. "Informationally motivated auditor replacement," Journal of Accounting and Economics, Elsevier, vol. 14(4), pages 347-374, December.
    3. Kennan, John & Wilson, Robert, 1993. "Bargaining with Private Information," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 45-104, March.
    4. DeAngelo, Linda Elizabeth, 1981. "Auditor independence, `low balling', and disclosure regulation," Journal of Accounting and Economics, Elsevier, vol. 3(2), pages 113-127, August.
    5. Antle, R & Nalebuff, B, 1991. "Conservatism And Auditor-Client Negotiations," Journal of Accounting Research, Wiley Blackwell, vol. 29, pages 31-54.
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    Cited by:

    1. Aloke Ghosh & Steven Lustgarten, 2006. "Pricing of Initial Audit Engagements by Large and Small Audit Firms," Contemporary Accounting Research, John Wiley & Sons, vol. 23(2), pages 333-368, June.
    2. Wang, Karl J. & Tuttle, Brad M., 2009. "The impact of auditor rotation on auditor-client negotiation," Accounting, Organizations and Society, Elsevier, vol. 34(2), pages 222-243, February.
    3. Oana Raluca Ivan, 2011. "Audit Fee Econometrical Models An Overview Of The Auditing Research Literature," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(13), pages 1-20.
    4. Pyung Kyung Kang & Yoo Chan Kim & Dan Palmon, 2020. "Client’s Bargaining Power and Audit Negotiation over Earnings: Evidence from Audit Processes in a Business Groups Environment," Group Decision and Negotiation, Springer, vol. 29(6), pages 1207-1238, December.
    5. Minlei Ye, 2023. "The Theory of Auditing Economics: Evidence and Suggestions for Future Research," Foundations and Trends(R) in Accounting, now publishers, vol. 18(3), pages 138-267, July.
    6. Bame-Aldred, Charles W. & Kida, Thomas, 2007. "A comparison of auditor and client initial negotiation positions and tactics," Accounting, Organizations and Society, Elsevier, vol. 32(6), pages 497-511, August.
    7. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    8. Helen Brown-Liburd & Jeffrey Cohen & Greg Trompeter, 2013. "Effects of Earnings Forecasts and Heightened Professional Skepticism on the Outcomes of Client–Auditor Negotiation," Journal of Business Ethics, Springer, vol. 116(2), pages 311-325, August.

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