The Effects of Client Status and the Number of Estimation Alternatives on Reporting Aggressiveness

What is it about?

Accounting estimates are highly subjective and multiple estimation alternatives often exist. When addressing audit-related adjustments with clients, auditors must decide whether to discuss all possible estimation alternatives or approach the client with only a single, auditor-preferred estimation alternative. In an experiment with experienced finance executives, we find clients with relatively higher status (those with a CPA license) take more aggressive financial reporting positions when the auditor approaches the client with multiple adjustment options.

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Why is it important?

Our study provides the first evidence that client status is a significant factor in auditor-client negotiations. We also demonstrate how auditors’ approach to client negotiations involving multiple allowable estimation alternatives can influence audit quality.