Auditor‐Auditee Negotiation Outcome: Effects of Auditee Business Risk, Audit Risk, and Auditor Business Risk in Tunisian Context

• Date: 01 September 2009
• Published date: 01 September 2009
• DOI: http://doi.org/10.1111/j.1467-8683.2009.00751.x
• Author: Manel Hadriche Sahnoun,Mohamed Ali Zarai

Auditor-Auditee Negotiation Outcome: Effects

of Auditee Business Risk, Audit Risk, and

Auditor Business Risk in Tunisian Context

Manel Hadriche Sahnoun* and Mohamed Ali Zarai

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study seeks to investigate the impact of auditee business risk, audit risk, and auditor

business risk evaluation on auditor-auditee negotiation outcomes. A model is developed and tested that characterizes the

auditor-auditee negotiation outcome as a process of risk evaluation and risk adaptation.

Research Findings/Insights: An experiment was conducted using 200 Tunisian auditors as participants. The results show

that the partners considered the relationship between audit risk and auditee business risk. Also, our results indicate that

auditee business risk has a signif‌icant effect on auditor-auditee negotiation outcomes. So, auditors will be less likely to

accept an auditee’s aggressivereporting practice when the auditee’s business risks are high. On the other hand, results show

that audit risk evaluation don’t affect auditor-auditee negotiation outcome. Finally, auditor business risk has a non-

signif‌icant effect on auditor-auditee negotiation outcome.

Theoretical/Academic Implications: This study provides evidence that despite the expectation of conservatism required by

generally accepted auditing principles (GAAP), certain environmental factors may cause auditors to acquiesce to auditee

preferences and allow more aggressive reporting. From stakeholders’ (e.g., investors, regulators) perspective, this is not

necessarily an optimal criterion for decisions that impact the f‌inancial statements. The expectations of stakeholders are that

auditors will select the most informative alternative.

Practitioner/Policy Implications: The implication for practiceis that accounting f‌irms may need to strengthen their internal

oversight mechanisms (e.g., peer reviews, concurring partner reviews) to ensure that auditors’ decisions are aligned with

the f‌irm’s, as well as stakeholders’, expectationsof audit quality.So, auditors must pay more attentionto f‌inancial statements

when business risk is high.

Keywords: Corporate Governance, Auditor-Auditee Negotiation, Auditee Business Risk, Audit Risk, Auditor Business

Risk, Structural Equation Modeling, Prospect Theory

INTRODUCTION

Audited f‌inancial statements are a joint product of both

the auditor and the auditee (Antle & Nalebuff, 1991;

Gibbins, McCracken, & Salterio, 2007; McCracken, Salterio,

& Gibbins, 2008), and auditors sometimes playan active role

in managing the auditee’s f‌inancial reporting choices

(Nelson, Elliott, & Tarpley, 2002). In the process of f‌inancial

reporting, circumstances may arise that lead to divergent

preferences between auditees and auditors on accounting

and reporting issues. The resolution of such f‌inancial

reporting issues can be especially diff‌icult when generally

accepted accounting principles (GAAP) are ambiguous (e.g.,

Johnstone, Bedard, & Biggs, 2002; Kadous, 2000; Nelson &

Kinney, 1997), since both parties may make different judg-

ments depending on their preferences.corg_751559..572

Despite the importance of auditor-auditee negotiation in

f‌inancial reporting, limited attention has been given to the

need for effective negotiations in situations that entail

subjective matters (e.g., accounting estimates, imprecise

accounting standards) (Gibbins, McCracken, & Salterio,

2005; Trotman, Wright, & Wright, 2005).

As a result of notorious f‌inancial scandals, such as World-

Com and Enron in the US and, on the European scene, the

f‌inancial crises at Parmalat in Italy,Ahold in the Netherlands,

and Batam a nd Affesin Tunisia, among others, the reliability

*Addresss for correspondence: Accounting Department, University of Tunis, Publi-

poste, BP225, Avenue Thaieb M’hiri, 2080 Ariana. Tel: 0021622741655; E-mail:

manel.hadriche@yahoo.fr

559

Corporate Governance: An International Review, 2009, 17(5): 559–572

© 2009 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2009.00751.x