Managers' Strategic Reporting Judgments in Audit Negotiations

SUMMARY:  Prior research has largely characterized audit negotiations as a dyadic relationship between auditors and managers. However, the Sarbanes-Oxley Act (SOX) substantially enhances the audit committee's oversight responsibilities for the financial reporting and auditing processes. Thus, negotiations post-SOX may be viewed as a triadic relationship that now involves the audit committee with the authority to scrutinize audit negotiations. Consistent with auditors considering their relative bargaining power and expectations of counterpart behavior, Brown-Liburd and Wright (2011) find that auditors are most contending when the audit committee is strong and the past relationship is contentious. We extend Brown-Liburd and Wright (2011) by examining the joint effects of these factors on managers' pre-negotiation judgments. We posit that rather than mirror auditor behavior, managers make different judgments because they have a different perspective and set of incentives than do auditors. Prior research sugg...