Paper presented at the 2006 American Accounting Association Auditing Section Mid-Year Meeting, Los Angeles, CA.Although the financial statements of an organization are considered a product of
management, prior research suggests that a company’s financial statements may be affected by
the negotiation strategy employed by the auditor when resolving audit differences with
management. However, little subsequent research has discussed the potential strategies that
auditors may employ during the negotiation process. Our study extends the literature by
investigating, in a post-Sarbanes-Oxley environment, whether auditors will employ a reciprocitybased
strategy for the resolution of audit differences and what client characteristics (client
management’s negotiating style and client retention risk) will increase the extent to which it is
utilized. Such a strategy involves bringing inconsequential items to management and
subsequently waiving these items in an effort to encourage management to be more cooperative
in the posting of significant income-decreasing adjustments. The results of our study indicate that
client management’s negotiating style and retention risk have an interactive effect on auditors’
use of a reciprocity-based strategy. Specifically, auditors are more likely to utilize a reciprocitybased
strategy when management’s negotiating style is competitive and client retention risk is
high. Interestingly, the end result of the negotiation process is essentially identical (i.e., similar
items are posted), regardless of client characteristics or the auditor’s utilization of a reciprocitybased
strategy. Thus, it appears that use of a reciprocity-based strategy does not affect the quality
of the financial statements, but simply facilitates the process of posting significant items
