Evolution of auditor-client negotiations from the initial audit tender to subsequent audit cycles: A qualitative study of (non)cooperativeness

Audit firm-client negotiations commence with the audit tender, continue in subsequent audit cycles, and often persist after rotation via consulting services. However, we do not understand how past negotiation behaviour, or anticipated future interactions, shape current audit negotiations. I interview 31 audit committee chairs, auditors and company managers (triads) and interrogate data from their public and private documents to understand the evolution of triad negotiations from the initial audit tender to subsequent annual audit cycles.

Employing McGinn and Keros’ (2002) negotiation framework, four key findings emerge. First, audit committee members become more cooperative in negotiations with auditors and company managers to acquire information and work effectively. Second, auditors are always cooperative to maintain positive relationships with audit committee members and company managers and protect their commercial interests. Third, company managers become more cooperative as they demonstrate their ability to negotiate effectively with auditors to audit committee members. However, there is a limit to their cooperativeness. Company managers are more concerned with meeting analysts’ earnings targets than maintaining the auditor relationship. My findings suggest that parties’ initial negotiation behaviour does not necessarily set a precedent for their counterparties’ subsequent behaviour. However, auditors’ anticipation of future consulting contracts encourages them to cooperate currently, although it may not always be appropriate to do so. Fourth, I uncover four new negotiation types and refine McGinn and Keros’ (2002) conceptualisation of negotiations.

This research is the first to study the evolution of auditor-client negotiations from the initial audit tender to subsequent audit cycles. My findings provide insights into how auditors’ balance their professional-commercial interests in client interactions, how audit committee members engage in and oversee audit and accounting negotiations, and company managers’ negotiation behaviour. Ultimately, my findings have implications for audit quality and address concerns at the heart of recent UK audit reviews and parliamentary inquires.