IDEAS home Printed from https://ideas.repec.org/a/eee/advacc/v68y2025ics088261102400052x.html

The effects of performance-based profit-sharing schemes and client pressure on auditors' pre-negotiation judgments

Author

Listed:
  • Das, Abhijit
  • Chong, Vincent K.
  • Masschelein, Stijn
  • Wang, Isabel Z.
  • Woodliff, David R.

Abstract

Prior studies in auditing have examined the impact of performance-based profit-sharing schemes (PES) and client pressure in terms of explicit pressure and implicit pressure on auditors' judgments independently, and there is an ex-ante expectation that these two factors will interact in the context of proposed audit adjustments in a prenegotiation setting. Based on the theory of motivated reasoning, this study examines whether explicit pressure by clients will have a smaller effect when auditors' PES is based on a firm-wide scheme as compared to a divisional scheme. We conduct a 2 × 2 between-subject experiment with 95 experienced auditors, predominantly audit managers from the US, that examines how performance-based profit-sharing schemes (i.e., firm-wide vs. divisional) of audit partners and client pressure (i.e., explicit vs. implicit) affect auditors' mindsets on the magnitude of provision for obsolete inventory to be reported in the client's financial statements in an auditor-client pre-negotiation setting. The findings show that auditors' PES and client pressure interact to affect auditors' behaviour in a pre-negotiation setting. Our results exhibit the concessionary (i.e., waiving a material audit adjustment) behaviour of audit partners, directors, and managers from the US. The findings extend contemporary research on auditor-client negotiation by providing evidence to the literature that PES schemes influence the behaviour of auditors in a pre-negotiation setting.

Suggested Citation

  • Das, Abhijit & Chong, Vincent K. & Masschelein, Stijn & Wang, Isabel Z. & Woodliff, David R., 2025. "The effects of performance-based profit-sharing schemes and client pressure on auditors' pre-negotiation judgments," Advances in accounting, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:advacc:v:68:y:2025:i:c:s088261102400052x
    DOI: 10.1016/j.adiac.2024.100781
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S088261102400052X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.adiac.2024.100781?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Bennett, G. Bradley & Hatfield, Richard C., 2018. "Staff auditors' proclivity for computer-mediated communication with clients and its effect on skeptical behavior," Accounting, Organizations and Society, Elsevier, vol. 68, pages 42-57.
    2. Steven Huddart & Pierre Jinghong Liang, 2003. "Accounting in Partnerships," American Economic Review, American Economic Association, vol. 93(2), pages 410-414, May.
    3. Huddart, Steven & Liang, Pierre Jinghong, 2005. "Profit sharing and monitoring in partnerships," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 153-187, December.
    4. Francis, Jere R., 2004. "What do we know about audit quality?," The British Accounting Review, Elsevier, vol. 36(4), pages 345-368.
    5. Saiewitz, Aaron & Kida, Thomas, 2018. "The effects of an auditor's communication mode and professional tone on client responses to audit inquiries," Accounting, Organizations and Society, Elsevier, vol. 65(C), pages 33-43.
    6. Aronow, Peter M. & Baron, Jonathon & Pinson, Lauren, 2019. "A Note on Dropping Experimental Subjects who Fail a Manipulation Check," Political Analysis, Cambridge University Press, vol. 27(4), pages 572-589, October.
    7. Michael Gibbins & Steven Salterio & Alan Webb, 2001. "Evidence About Auditor–Client Management Negotiation Concerning Client’s Financial Reporting," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 39(3), pages 535-563, December.
    8. Marwan Sinaceur & Margaret A. Neale, 2005. "Not All Threats are Created Equal: How Implicitness and Timing Affect the Effectiveness of Threats in Negotiations," Group Decision and Negotiation, Springer, vol. 14(1), pages 63-85, January.
    9. Long, James H. & Basoglu, K. Asli, 2016. "The impact of task interruption on tax accountants' professional judgment," Accounting, Organizations and Society, Elsevier, vol. 55(C), pages 96-113.
    10. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    11. Maleen Z. Gong & Aldónio Ferreira, 2014. "Does consistency in management control systems design choices influence firm performance? An empirical analysis," Accounting and Business Research, Taylor & Francis Journals, vol. 44(5), pages 497-522, October.
    12. Allen D. Blay, 2005. "Independence Threats, Litigation Risk, and the Auditor's Decision Process," Contemporary Accounting Research, John Wiley & Sons, vol. 22(4), pages 759-789, December.
    13. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-817, August.
    14. Carcello, Jv & Palmrose, Zv, 1994. "Auditor Litigation And Modified Reporting On Bankrupt Clients," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 32, pages 1-30.
    15. Bamber, Em, 1983. "Expert Judgment In The Audit Team - A Source Reliability Approach," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 21(2), pages 396-413.
    16. Peter J. Carey & Marshall A. Geiger & Brendan T. O’Connell, 2008. "Costs Associated With Going‐Concern‐Modified Audit Opinions: An Analysis of the Australian Audit Market," Abacus, Accounting Foundation, University of Sydney, vol. 44(1), pages 61-81, March.
    17. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    18. Karen Wilken Braun, 2001. "The Disposition of Audit†Detected Misstatements: An Examination of Risk and Reward Factors and Aggregation Effects," Contemporary Accounting Research, John Wiley & Sons, vol. 18(1), pages 71-99, March.
    19. Baltes, Boris B. & Dickson, Marcus W. & Sherman, Michael P. & Bauer, Cara C. & LaGanke, Jacqueline S., 2002. "Computer-Mediated Communication and Group Decision Making: A Meta-Analysis," Organizational Behavior and Human Decision Processes, Elsevier, vol. 87(1), pages 156-179, January.
    20. Lennox, Clive, 2000. "Do companies successfully engage in opinion-shopping? Evidence from the UK," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 321-337, June.
    21. Burrows, Geoff & Black, Christopher, 1998. "Profit sharing in Australian Big 6 accounting firms: An exploratory study," Accounting, Organizations and Society, Elsevier, vol. 23(5-6), pages 517-530.
    22. Hun†Tong Tan & Ken T. Trotman, 2010. "Effects of the Timing of Auditors’ Income†Reducing Adjustment Concessions on Financial Officers’ Negotiation Judgments," Contemporary Accounting Research, John Wiley & Sons, vol. 27(4), pages 1207-1239, December.
    23. Antle, R & Nalebuff, B, 1991. "Conservatism And Auditor-Client Negotiations," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 29, pages 31-54.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jürgen Ernstberger & Christopher Koch & Eva Maria Schreiber & Greg Trompeter, 2020. "Are Audit Firms' Compensation Policies Associated with Audit Quality?," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 218-244, March.
    2. Kevin Koh & Li Li & Xuejiao Liu & Chunfei Wang, 2023. "The Effect of Audit Partner Diversity on Audit Quality: Evidence from China," Abacus, Accounting Foundation, University of Sydney, vol. 59(1), pages 340-380, March.
    3. Daniel Aobdia, 2020. "The Economic Consequences of Audit Firms’ Quality Control System Deficiencies," Management Science, INFORMS, vol. 66(7), pages 2883-2905, July.
    4. W. Robert Knechel & Lasse Niemi & Mikko Zerni, 2013. "Empirical Evidence on the Implicit Determinants of Compensation in Big 4 Audit Partnerships," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 51(2), pages 349-387, May.
    5. Garcia-Blandon, Josep & Argiles, Josep Ma, 2015. "Audit firm tenure and independence: A comprehensive investigation of audit qualifications in Spain," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 24(C), pages 82-93.
    6. Francis, Jere R., 2004. "What do we know about audit quality?," The British Accounting Review, Elsevier, vol. 36(4), pages 345-368.
    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. Li Li & Xuejiao Liu & Wenqi Pei & Yifei Xia, 2025. "Air Pollution, Auditors' Affective States, and Audit Quality," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 65(3), pages 3142-3173, September.
    9. Knechel, W. Robert & Thomas, Edward & Driskill, Matthew, 2020. "Understanding financial auditing from a service perspective," Accounting, Organizations and Society, Elsevier, vol. 81(C).
    10. Papirakis, Rachel, 2022. "Auditors’ self-actualization and ability to resist client pressure: Evidence from Canada," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 47(C).
    11. Richard C. Hatfield & Christopher P. Agoglia & Maria H. Sanchez, 2008. "Client Characteristics and the Negotiation Tactics of Auditors: Implications for Financial Reporting," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 46(5), pages 1183-1207, December.
    12. Sanoran, Kanyarat (Lek), 2018. "Auditors’ going concern reporting accuracy during and after the global financial crisis," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(2), pages 164-178.
    13. Jian Cao & Feng Chen & Julia L. Higgs, 2016. "Late for a very important date: financial reporting and audit implications of late 10-K filings," Review of Accounting Studies, Springer, vol. 21(2), pages 633-671, June.
    14. Ball, Fiona & Tyler, Jonathan & Wells, Peter, 2015. "Is audit quality impacted by auditor relationships?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(2), pages 166-181.
    15. Firth, Michael & Rui, Oliver M. & Wu, Xi, 2012. "How Do Various Forms of Auditor Rotation Affect Audit Quality? Evidence from China," The International Journal of Accounting, Elsevier, vol. 47(1), pages 109-138.
    16. Sarowar Hossain & Larelle Chapple & Gary S. Monroe, 2018. "Does auditor gender affect issuing going‐concern decisions for financially distressed clients?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(4), pages 1027-1061, December.
    17. Douglas, Ella & Lont, David & Scott, Tom, 2014. "Finance company failure in New Zealand during 2006–2009: Predictable failures?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(3), pages 277-295.
    18. Curtis Hall & J. Scott Judd & Jayanthi Sunder, 2023. "Auditor conservatism, audit quality, and real consequences for clients," Review of Accounting Studies, Springer, vol. 28(2), pages 689-725, June.
    19. Perreault, Stephen & Kida, Thomas, 2011. "The relative effectiveness of persuasion tactics in auditor–client negotiations," Accounting, Organizations and Society, Elsevier, vol. 36(8), pages 534-547.
    20. Lennox, Clive & Wang, Chunfei & Wu, Xi, 2023. "Delegated leadership at public accounting firms," Journal of Accounting and Economics, Elsevier, vol. 76(1).

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:advacc:v:68:y:2025:i:c:s088261102400052x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/advances-in-accounting/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.