Auditor-client negotiations of financial statement adjustments

An independent auditor is often unwilling to issue an unqualified opinion on the financial statements as prepared by client management. When this is the case, the auditor will propose adjusting journal entries. If the client is averse to posting any or all of the adjusting journal entries, the auditor and client will negotiate over which entries get posted and which get waived.; This study examines a particular strategy used by auditors involving cognitive heuristics identified in the behavioral decision theory literature to aid them in their negotiations with clients over financial statement adjustments. I examine whether the strategy of proposing more audit adjustments than needed for an unqualified opinion and then agreeing to waive some of the immaterial adjustments (the “Concession Strategy”) is an effective strategy. An effective strategy is one whereby (1) The likelihood of the client posting the material adjustments is greater than when not using the Concession Strategy, (2) Higher client satisfaction results than when not using the Concession Strategy, and (3) The likelihood of the client using the audit firm again the following year is greater than when not using the Concession Strategy.; The results of the study indicate that the Concession Strategy increases the willingness of the client to post material audit adjustments, increases client satisfaction, and increases the likelihood of the client using the auditing firm again the subsequent year. A more complete understanding of the auditor-client negotiation process has implications for both professionals and academics.