Title

Effects of Earnings Forecasts and Heightened Professional Skepticism on the Outcomes of Client-Auditor Negotiation

Authors

Authors

H. L. Brown-Liburd; J. Cohen;G. Trompeter

Comments

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Abbreviated Journal Title

J. Bus. Ethics

Keywords

Professional skepticism; Negotiation; Earnings management; Auditor's; ethics; Audit judgment; CORPORATE GOVERNANCE; MANAGE EARNINGS; JUDGMENTS; COMMITTEE; RISK; INCENTIVES; ENGAGEMENT; REVISIONS; STRENGTH; BEHAVIOR; Business; Ethics

Abstract

Ethics has been identified as an important factor that potentially affects auditors' professional skepticism. For example, prior research finds that auditors who are more concerned with professional ethics exhibit greater professional skepticism. Further, the literature suggests that professional skepticism may lead the auditor to more vigilantly resist the client's position in financial reporting disputes. These reporting disputes are generally resolved through negotiations between the auditor and client to arrive at the final reported amounts. To date, the role that professional skepticism potentially plays in the negotiation process has been relatively unexplored. The literature prior to the enactment of Sarbanes-Oxley (SOX) suggests that auditors are more likely to approve a client position when the matter in dispute is relatively ambiguous and when changing the client's position will result in the client failing to meet analysts' expectations. However, changes resulting from SOX have led auditors to be more vigilant and therefore results found in the pre-SOX environment may not hold in the current environment where auditors are held more accountable for their actions. Results from an experiment with experienced audit managers and partners suggest that in the post-SOX climate, auditors' negotiations do not appear to be substantively influenced by management being able to meet or beat forecasts. Moreover, we find that when auditors exhibit heightened professional skepticism, they are more ethical by being conservative and they stand more resolute than when auditors do not exhibit heightened professional skepticism. Finally, although we do not find a main effect for the influence of earnings forecast, we do find a significant interaction between earnings forecast and heightened professional skepticism. Implications for practice and research are then presented.

Journal Title

Journal of Business Ethics

Volume

116

Issue/Number

2

Publication Date

1-1-2013

Document Type

Article

Language

English

First Page

311

Last Page

325

WOS Identifier

WOS:000324495900006

ISSN

0167-4544

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