Description
We carry out an interview based field study of chief financial officer (CFO)–audit partner dyads to examine the
assumption that the roles played by each side and the nature of the relationships are similar across negotiations. These
dyads freely discussed with us their relationship, a specific issue negotiated and it’s resolution process. Employing the
lens of social positioning negotiation research, we find these negotiations are ‘fluid’, with continual redefinition not only
of the substantive issues under negotiation, but also of the negotiation roles and relationships
Auditor–client management relationships and roles
in negotiating ?nancial reporting
Susan McCracken
a
, Steven E. Salterio
b,
*
, Michael Gibbins
c
a
DeGroote School of Business, McMaster University, Canada
b
School of Business, Queen’s University, Kingston ON, Canada K7L 3N6
c
School of Business, University of Alberta, Canada
Abstract
We carry out an interview based ?eld study of chief ?nancial o?cer (CFO)–audit partner dyads to examine the
assumption that the roles played by each side and the nature of the relationships are similar across negotiations. These
dyads freely discussed with us their relationship, a speci?c issue negotiated and it’s resolution process. Employing the
lens of social positioning negotiation research, we ?nd these negotiations are ‘?uid’, with continual rede?nition not only
of the substantive issues under negotiation, but also of the negotiation roles and relationships (i.e. ‘shadow’ negotia-
tions). The CFO’s actions and expectations in these ‘shadow’ negotiations appear to de?ne the auditor’s role and
the relationship’s parameters, but both can evolve over time. The audit partners express a desire to be in the ‘‘ideal’’
relationship where they assume the role of the ‘expert advisor’ (as opposed to a ‘police o?cer’) but they seemingly have
no explicit strategy to move the relationship toward a ‘proactive’ (rather than ‘reactive’) state. Furthermore, the audit
partner is always the ‘relationship manager’ whose job it is to see that client management remains ‘‘happy’’. These roles
and relationships negotiated in the ‘shadows’ also a?ect how the negotiation process unfolds, including the set of alter-
native accounting treatments considered during negotiations. Finally, audit ?rms appear to manage the assignment of
partners to engagements based on CFO preferences and remove those partners who are in ‘‘poor’’ relationships, irre-
spective of why the relationship is considered by the CFO to be ‘‘poor’’. Implications for the broader research program
on auditor–client management negotiations are discussed.
Ó 2007 Elsevier Ltd. All rights reserved.
Introduction
Auditor–client management negotiation re-
search, while increasing, is still understudied, with
much of the research concentrating only on the
audit partner. Negotiation, however, is dependent
on more than one party. This study speci?cally
0361-3682/$ - see front matter Ó 2007 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2007.09.002
*
Corresponding author. Tel.: +1 613 533 6926; fax: +1 613
533 2325.
E-mail address: [email protected] (S.E. Salt-
erio).
Available online at www.sciencedirect.com
Accounting, Organizations and Society 33 (2008) 362–383
www.elsevier.com/locate/aos
focuses on actual audit partner–chief ?nancial o?-
cer (CFO) dyads (the two main negotiators), who
discuss their roles, relationships and the negotia-
tion of a speci?c issue(s). This shift in focus distin-
guishes our study, as prior research has rarely
focused on the audit partner–chief ?nancial o?cer
(CFO) dyad in an actual relationship (Beattie,
Fearnley, & Brandt, 2001; Beattie, Fearnley, &
Brandt, 2004).
The underlying assumption in the accounting
negotiation literature to date is that each party has
agency, in the sense of an ability to advocate for a
position within a well-determined role embedded
in a well-understood relationship (Kolb, 2004a).
However, as Lewicki, Barry, and Saunders (2006,
p. 276) point out, ‘‘only recently have researchers
begun to examine negotiations in a relationship
context . . .. where the parties have a substantial his-
tory and anticipate a long future relationship’’, a
characteristic of typical audit partner–CFO negoti-
ations.
1
We employ one such line of negotiation
research, social positioning, which examines how
parties to a negotiation focus not only on the sub-
stantive issue being negotiated, but also, partake
in a ‘shadow’ negotiation (a negotiation over inter-
pretation of negotiator’s roles and actions permissi-
ble in the relationship that takes place
simultaneously with the negotiation over substan-
tive issues) where they attempt to position them-
selves and each other with regard to their roles,
the legitimacy of their positions and their relative
negotiating power (Kolb, 2004a). Prior research
posits that this ongoing ‘shadow’ negotiation a?ects
how any substantive negotiation is carried out and
who claims the most ‘value’ in the current process’s
outcome (Kolb & Williams, 2000).
In this paper, we analyze interviews in which
dyads of CFOs and their audit partners describe
the negotiation of a speci?c accounting issue.
The interview process involved extensive research
of archival documents (including news accounts,
webcasts, regulatory disclosures) for each com-
pany, separate open-ended questioning of each
audit partner and CFO, and speci?c follow-up
questioning of the interviewees to ensure all
aspects of the negotiation process and relationship
had been covered. This research approach permits
us to actively listen to the thoughts of both parties
on their relationships and their roles in the context
of negotiating a substantive accounting issue,
albeit after the fact. Hence, this research is consis-
tent with Cooper and Robson’s (2006, p. 435) call
for ?eld studies to ‘‘examine how accounting and
audit decisions are made’’.
Analyses of the interviews involved two coders
extensively reviewing the interview transcripts to
identify key themes important to the negotiations.
Themes consistently identi?ed by both coders dem-
onstrate the unique characteristics of auditor–cli-
ent management negotiation. We also ?nd clear
evidence that issue ‘?uidity’ (Kolb & Williams,
2000), a fundamental predicate of social position-
ing research in negotiation, is replicated in our
dyads, supporting our use of social positioning
negotiation research as our theoretical lens.
2
Our analysis indicates that the CFOs de?ne the
relationship and the roles. Some CFOs position
the relationship as being ‘proactive’, where the
CFO initiates consultations with the audit partner
before transactions are undertaken or disclosures
drafted to ensure that the ?nancial statements
are of ‘‘high quality’’. Our audit partners
embraced this ‘expert advisor’ role and relationship
as their ‘‘ideal’’ and discussed how they would like
all client relationships to be proactive.
Other CFOs position the auditor into a ‘reac-
tive’ relationship. In these relationships, the CFO
views the ?nancial statements as being ‘‘his’’ and
does not typically consult the auditors regarding
appropriate GAAP treatment. This approach
results in the audit partner not identifying issues
until late in the audit, with the CFO strongly com-
1
We adopt the convention of using double quotation marks
and text indentations to indicate direct quotes either from our
interviews or the cited sources. Single quotation marks indicate
our use of a term to describe a concept that is used with
acknowledgement from other sources. We bold and put in
single quotation marks when we ?rst introduce terms we use to
describe concepts that we de?ne in this paper, after that they
appear in plain text.
2
‘Fluidity’ of what is being audited and how the audit is
carried out has been researched in the public sector (e.g., Power,
1997b; Radcli?e, 1999) but this is the ?rst instance we are aware
of in the for-pro?t sector.
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 363
mitted to his position and, thus, making the nego-
tiations more di?cult. While some audit partners
report they resist (e.g., Dirsmith, Heian, & Coval-
eski, 1997) being cast in this ‘police o?cer’ role and
reactive relationship, others are content to accept
it, with the belief that they can transform the rela-
tionship over time.
Interestingly, other than the passage of time
and getting to know the CFO better, audit part-
ners appear not to have developed strategies to
convert these reactive relationships into proactive
relationships. In addition, audit ?rm management,
aware of these two audit partner roles, matches
audit partners with CFOs so that partners who
are the least resistant to being in a reactive rela-
tionship are assigned to CFOs who desire that type
of relationship and partners who strongly prefer a
proactive relationship are assigned to those CFOs
who desire the same.
Turning to the process, in both types of rela-
tionships the dyads work together to resolve the
issues and even when the discussions become
heated, the auditor is often able to maintain a cor-
dial relationship with the client. Our analysis also
shows that, regardless of the relationship, the audit
partner is the ‘‘relationship manager’’, responsible
for keeping the client ‘‘happy’’ and the relationship
in a ‘‘good’’ state (Kolb & Williams, 2000).
Finally, and again consistent with the social
positioning negotiation research, we see that the
‘shadow’ negotiations have e?ects on the substan-
tive issue being negotiated. Our analysis suggests
that the audit partner’s development of a potential
solution set and the approaches used to resolving
the accounting issue are a?ected by the CFO-insti-
gated relationship norms. Hence, there are poten-
tial real e?ects to the ?nancial statements from
the CFO’s actions to position the auditor into a
certain relationship type and role in that relation-
ship. Overall, our research further ?eshes out audit
scholarship that examines the ‘‘back stage’’
(Power, 2003) of audit practice.
We proceed as follows: ‘‘Role and relationship in
negotiation research’’ brie?y reviews the negotia-
tion research on roles and relationships. ‘‘Research
sites’’ describes our research sites and ‘‘Research
method’’ describes our research method, the com-
bined archival and interview approach. ‘‘Analyses
of roles and relationships’’ presents our analysis
whereas ‘‘Conclusions: expanding our understand-
ing of accounting negotiation’’ discusses how our
?ndings expand our understanding of auditor–cli-
ent relationships and negotiations.
Role and relationship in negotiation research
Most prior research on negotiation has focused
on negotiations between unrelated parties with no
prior knowledge of one another (Lewicki et al.,
2006). One stream of negotiation research, how-
ever, has studied negotiation relationships in rich
and natural ?eld contexts in a variety of settings,
including health care (Kolb, 2004b) and public
schools (e.g. Putnam, 2003; Putnam, 2004), and
where relationships are developed and continuing,
analogous to the audit partner–CFO relationship
being studied in this paper. This research stream
views negotiation as taking place on two levels
simultaneously. In addition to negotiating the sub-
stantive issue, the participants are involved in a
‘shadow’ negotiation to de?ne the roles of the
negotiators and their relationships (Kolb & Wil-
liams, 2000). This type of negotiation research,
denoted as the social positioning perspective, views
negotiators as being engaged in constructing their
roles and relationships, subject to the expectations
and constraints of the social structure in which
they ?nd themselves (Kolb, 2004a). The focus is
on the relationships and how the roles are (de)con-
structed in the negotiation.
3
Kolb (2004b) explores ways that social posi-
tioning can occur in negotiation through ‘moves’
that involve the actions taken by each party to
structure their own role and to de?ne the role of
the other party. The outcomes of these ‘moves’
can either enhance one’s ability to advocate for
one’s interests or undermine the ability of the
other side to do the same (Kolb, 2004a), hence
a?ecting both how the relationship works and
the power of each negotiator. Tactics Kolb cites
that can be used to gain such an advantage include
challenging the experience/expertise of the other
3
Indeed, some writers have dubbed this as ‘‘role negotiation’’
(Gerson & Preiss, 1985 as cited in Kolb, 2004a).
364 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
side, demeaning the other sides’ ideas, criticizing
their approach to negotiation and making implicit
or explicit threats to end the relationship (Kolb,
2004a). Each of these tactics can be seen as exer-
cises in power by attempting to put the other party
in ‘‘his or her place’’.
When one negotiator makes a ‘move’ the other
party can resist the ‘move’ via a ‘turn’ (Kolb,
2004a). ‘Turns’ are the tactics employedby the party
who has been subject to a ‘move’ to resist the
attempted positioning. Kolb (2004a) suggests sev-
eral ways that a party can ‘turn’ a ‘move’, via inter-
rupting (or suspending) the negotiation, naming the
tactic being used by the other party, questioning the
other party as to why they did what they did, cor-
recting the other party’s assumption and suggesting
a replacement for it, and diverting the attention
back to the substantive issue. It is through these
‘moves’ and ‘turns’ that the ‘shadow’ negotiation
about relationships and roles takes place.
This strategic positioning negotiation research
provides a lens through which we examine the rela-
tionships among our audit partner–CFO dyads.
Hence, in carrying out our analysis of the themes
in our dyads, we are informed by social position-
ing research, whilst being alert for alternative
interpretations and patterns.
Research sites
This section describes the negotiation contexts
and the issues being negotiated, which form the
background for our subsequent analysis of the
‘shadow’ negotiation of roles and relationships.
We also discuss how we obtained access to this
sensitive data as previous researchers have found
access to be a non-trivial problem in this area
(e.g., Gendron, 2000).
The dyads – obtaining access
We approached nine companies’ CFOs (all but
two interviewees had the formal title of CFO and
the other two were the CFO but the CFO title
was not used in their ?rm), employing our col-
leagues’ contacts in corporate Canada, with a
request for an interview on the subject of audi-
tor–client management negotiation about account-
ing issues. All nine CFOs approached agreed to be
interviewed. Interviews were conducted in Novem-
ber and December 2001. Eight of the nine CFOs
provided us with a speci?c example of an account-
ing negotiation. The ninth CFO and the com-
pany’s controller described the process they went
through to ensure that their accounting was so
‘‘conservative’’ and GAAP-compliant that there
was no reason for negotiations to ever occur.
At the conclusion of each CFO interview, we
asked if the CFO would be willing to allow us to
speak to the audit partner. Eight of the nine CFOs
agreed to allow us to interview the audit partner
and to grant the partner permission to candidly
discuss the relationship with the CFO and client
company.
4
We agreed that we would not divulge
to the audit partner the speci?c example the
CFO had discussed with us, so the audit partner
would not know which negotiation(s) were on
the CFO’s mind, which could potentially have
caused future problems for the CFO. The only
CFO who would not give permission to interview
the audit partner had described an issue that took
place less than two weeks before our interview,
and felt it would not be prudent to focus the part-
ner on negotiation with the CFO so soon after this
issue’s resolution.
5
Hence, there was a potential of
seven matched issues going into our interviews
with the audit partners (nine less one no permis-
sion and one no example). Five of the seven audit
partners independently chose the same negotiation
issue that their respective CFO had, giving us ?ve
common issues in ?ve relationships in addition to
?ve other issues across three relationships for anal-
ysis. As we are studying roles and relationships, we
carried out our analysis across all eight dyads, pay-
ing attention to any discrepant information that
arose in dyads not describing the same issue.
4
Several of the audit partners required this permission in
writing (in addition to orally from the CFO) due to their
understanding of the client con?dentiality section of the Rules
of Professional Conduct (ethical standards for Canadian
professional accountants) (ICAO, 2004a).
5
The CFO told us to ‘‘come back in six months or a year’’
and permission would be granted. Due to later events in that
company, that was not possible.
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 365
The dyads in context
The companies were in industries that included
?nancial services, high technology, manufacturing,
food and beverage, and travel and hospitality.
They were located in a large urban international
?nancial centre as well as in a nearby regional cen-
tre. We denote the eight dyads as being Companies
A to H. The then Big 5 audit ?rm o?ces varied in
size from well in excess of ?fty audit partners (plus
the usual assortment of tax, management advisory
services and other partners) to as few as ?ve to 10
audit partners. Table 1 summarizes the company-
speci?c information for the CFO and the company
as well as the audit partner and audit ?rm (limited
in detail by our promise of anonymity to our inter-
viewees). Below we summarize the relationship
contexts and accounting issues discussed.
Company A
Company A strives to ?ve-star quality in all
aspects of its business, including its ?nancial report-
ing. The CFO is somewhat o?ended by GAAP and
often believes that the substance of the business is
not accurately conveyed when GAAP are applied.
The audit partner is highly respected and valued
by the CFO, other executives and his ?rm.
The issue, not entirely resolved at the time of
the interviews, was due to an economic downturn
that resulted in the stock price moving below the
conversion price for a material convertible debt-
equity instrument. The issue was whether the
instrument was debt or equity. The CFO identi?ed
the issue, and although he and his accounting team
researched it, he called in the auditors to take the
lead on resolving it. Given the issue’s seriousness,
high-level members of Company A were involved
in the resolution process. A temporary truce based
on the audit partner’s position was taken, with the
expectation that the issue would resolve itself by
year-end.
Company B
Company B has an objective of expansion. The
CFO describes himself as being aggressive when
applying GAAP, and believes that he has the ?nal
say over what is reported in the ?nancial state-
ments, often causing issues with the auditor. The
audit partner has been involved with Company B
since its start-up. His approach is to work with
the client to resolve issues in a manner suitable
to the client.
The issue, identi?ed by the auditors late in the
audit, related to a recent change in tax legislation.
The CFO applied new legislation when calculating
the company’s tax provision, as it would allow for
better ?nancial results. The audit partner pointed
out that the new legislation was just proposed and
had not been enacted, and thus, could not be
applied. The CFOhad released guidance to analysts
based on his interpretation of the new legislation,
causing him to be even more entrenched in his posi-
tion. The audit partner worked with Company B’s
audit team to ?nd compensating items to o?set the
improper treatment of the tax provision. Thus, the
CFO’s position was accepted, with the audit partner
requiring other previously unbooked adjustments.
Company C
The ?nancial reporting for Company C is lar-
gely controlled by the US head o?ce. Likewise,
the audit partner’s explicit role is set by the US
o?ce in charge of the parent company’s audit.
The issue was due to the tight reporting dead-
lines required by the auditors of the parent com-
pany. Both sides had managed for a number of
years to deal with an ongoing sales cut-o? issue
by ensuring that the sales in the ‘‘stub’’ periods
did not materially di?er.
6
In the current year, the
di?erence in the sales for the two stub periods
approached materiality, potentially warranting
an adjustment. In the end, both sides determined
that the adjustment was not material.
Company D
Company D is a conservative company that
prides itself on providing a high quality product.
The CFO is not a GAAP supporter but
6
Due to the tight reporting deadline, Company C closed its
books on December 24th each year, and then would use the 52
weeks ending on that date for the ?scal reporting. The auditors
of Company C would compare the two ‘‘stub’’ periods,
December 24th to December 31st for the year under audit
and the previous year, to ensure that the transactions that
occurred did not materially di?er.
366 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
Table 1
Description of CFO and the company; the audit ?rm and audit partner (as at nearest year-end prior to interview date for each company)
CFO–Audit partner dyads describing the same issue CFO–audit partner dyads describing a
di?erent issue
Company A Company B Company C Company D Company E Company F Company G Company H
Panel A: The CFO
1. Interviewee’s professional accounting
quali?cation(s)
CA
*
CA CA CA CA CA CA N/A
CA
**
2. Interviewee’s years of business
experience
>20 years 10–15 years >20 years >20 years 15–20 years 10–15 years >20 years >20 years
>15 years
*
3. Frequency of interviewee’s reported
experience negotiating accounting issues
Rarely Most years Rarely Most years Most years Most years Most years Never
Never
***
Panel B: The CFO’s organization
1. CFO’s organization description
(a) Type of organization Public
company
Public
company
Subsidiary of large
public multi-
national company
Public
company
Public
company
Public
company
Public
company
Public
company
(b) Annual revenue ($CDN) 100–499
million
100–499
million
N/A 1 billion–10
billion
100–499
million
25–50
million
1 billion–10
billion
1 billion–10
billion
(c) Total assets ($CDN) 500–999
million
100–499
million
N/A 1 billion–10
billion
100–499
million
25–50
million
100–499
million
1 billion–10
billion
Panel C: The audit ?rm and audit partner
1. Type of audit ?rm Big 5 Big 5 Big 5 Big 5 Big 5 and
local ?rm
*
Big 5 Big 5 Big 5
2. Recency of negotiation example 0-3 months 6 months to
1 year
More than 2 years 3–6 months 6 months to
1 year
1 years 6months to
1 year
1–2 years
3. Length of interviewee’s relationship
with CFO
More than 3
years
More than 3
years
More than 3 years More than 3
Years
One year One year One year More than 3
years
4. Interviewee’s years of audit
experience
>20 years >5 years >10 years >20 years >10 years >10 years >10 years >10 years
5. Interviewee’s reported experience
with accounting negotiations
Every year Every year Every year Every year Every year Every year Every year Every year
Notes to Panel A:
*
CA – Chartered Accountant.
**
CFO who was not a professional accountant had his controller participate fully in a joint interview between the researchers and the CFO and controller.
***
Despite both CFO and controller reporting ‘‘never’’ the audit partner easily recited several recent issues where he felt he was negotiating with client management.
Note to Panel C:
*
Company E has two audit ?rms for historical reasons associated with the founding of Company E. The local ?rm works on a well de?ned low risk area of the audit as
described by the Big 5 ?rm audit partner as well as the CFO. We only interviewed the Big 5 partner, not the local ?rm partner.
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understands that meeting GAAP is required for
unquali?ed ?nancial statements. The audit partner
is typically involved in the goings-on of Company
D throughout the year due to the complexity of
the business, and the CFO’s appreciation of the
need to comply with GAAP.
The issue related to a changed accounting stan-
dard with respect to the amortization of goodwill.
The audit partner recommended that goodwill no
longer be amortized. The CFO wanted to continue
to amortize the goodwill. Both sides worked
together, with the CFO requesting the auditors
to research the treatment by similar companies.
The result was to report as the CFO preferred,
however, the audit partner required additional dis-
closure in the notes.
Company E
Company E is struggling to improve operations
and results. The CFO follows the aggressive
reporting mandate set by the CEO and other
senior executives. The audit ?rm is a long-time
auditor of the company, however, the previous
audit partner was replaced with our interviewee
because he could not get along with the new CFO.
The issue arose from the company not doing as
well as it would like and dealt with whether to rec-
ognize a large customer prepayment (i.e. cash
deposit) as a liability or revenue. The senior man-
agement team was pressing to recognize the pre-
payment as revenue. The auditors were not
contacted until after the contract was written, the
transaction was entered into, and draft year end
?nancial statements were prepared on the basis
the prepayment was revenue. The audit partner
did not agree with this treatment. The CFO
believed that the audit partner’s interpretation of
treating it as a liability was illogical and mislead-
ing. In the end, the auditor’s position was accepted
and the audit partner was required to aid the CFO
in persuading the CEO and audit committee that
this was the appropriate GAAP treatment. This
resulted in Company E not meeting market expec-
tations and su?ering a decline in stock price.
Company F
Company F and its CFO are relatively aggres-
sive ?nancial reporters. The CFO believes the
audit ?rm, and particularly, the previous audit
partner, treated his company too conservatively.
Indeed, the CFO put the audit out to tender, due
to his disgruntlement. In the end, the original audit
?rm was retained; however, a change in partner
was a condition of renewing the engagement.
The newly-assigned audit partner, our interviewee,
has been commissioned by his ?rm to work hard to
retain the client.
The issue discussed by the CFO was the result of
an economic downturn. Company F required cash
and convinced a customer to make an advance
deposit for sales. After consultation with the audi-
tors, Company Frecorded the prepayment as a loan
with an interest component. The CFO gave earn-
ings guidance to ?nancial analysts based on this
accounting treatment. Subsequently, the customer
purchased Company F’s product more quickly than
expected and used up the advance deposit within a
month or so causing the auditors to change their
position and suggest that some of the deposit be rec-
ognized as a discount, not interest. After what both
described as contentious negotiations, the CFO’s
position was accepted by the audit ?rm.
The issue discussed by the audit partner for
Company F was about di?erences in how to recog-
nize revenue, which he believed resulted in the
audit being put out to tender. Although he pre-
ferred a more conservative treatment, he searched
for a compromise and ended up accepting the
CFO’s position, provided there was additional dis-
closure in the notes.
Company G
Company G has recently been acquired by a
larger company in the same industry. The CFO, a
former audit partner, believes that, since he has been
on both sides, he knows how to produce the ?nan-
cial statements and therefore requires little help
from the auditors. He was not happy when the
acquirer made him switch audit ?rms. Indeed, the
?rst audit partner appointed by the new audit ?rm
lasted only one year on the engagement before being
replaced. The new, more-experienced audit partner
reported in our interview that he had been charged
with improving the relationship with the CFO.
The issue discussed by the CFO had, according
to the CFO, caused the ?rst audit partner to be
368 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
replaced because of a personality clash between the
two. The CFO and audit partner had opposing
views on how to account for restructuring costs
related in part to the acquisition. The CFO wanted
to capitalize some of the costs because he believed
they added future value; however, the audit partner
insisted that all of the costs be expensed. The CFO
was not at all open to the audit partner’s opinion or
arguments, causing the issue to be escalated to the
national o?ce of the acquiring company’s audit
?rm. In the end, the CFO’s position was accepted.
The issue discussed by the audit partner dealt
with di?erences in footnote disclosures. He recom-
mended more concise and clear disclosure of sev-
eral material items. The CFO, who the auditor
reported viewed the ?nancial statements as ‘‘his’’,
would not agree that the proposed note disclosure
was more transparent and demanded that his note
disclosure be accepted.
Company H
Company H had been spun o? from a huge
multi-national company some years ago. The
CFO proudly stated that his company had never
had an issue requiring negotiation with the audi-
tors. He believes his company is extremely conser-
vative in its ?nancial reporting. The audit partner
became the engagement partner after the previous
partner was rotated o? the audit in accordance
with the audit ?rm’s partner rotation policy. She
was able to identify several issues that she had
negotiated with this client.
The issue discussed by the audit partner was
due to her and the CFO having di?erent interpre-
tations of how to account for goodwill under
then-new accounting standards. The company’s
?nancial management and audit partner worked
together to come up with a solution that would
be mutually satisfactory. In the end, the company
management got its preferred treatment for the
accounting numbers; however, the audit partner
obtained additional disclosure.
Research method
Prior to each of our interviews, we read the
three previous years’ annual reports and proxy
statements, examined analysts’ reports for each
company, listened to archived conference calls
between the company and analysts, and examined
newspaper stories for the preceding twelve months.
Hence, going into each interview we had a rich set
of declarative knowledge with which to contextu-
alize our interviewee’s ‘story’ (Kolb & Williams,
2000).
The CFOs and audit partners were interviewed
separately, without the CFO knowing that we were
going to ask him or her to let us interview the audit
partner. In addition, for one dyad we had the
opportunity to discuss the negotiation process
with the audit committee chair (e.g., see Gendron
& Be´dard, 2006 on audit committee involvement
with di?cult accounting issues). That interview
did not provide any observations that were new
(vis a` vis the CFO–audit partner interviews), and
provided corroboration for much of what the
CFO and audit partner told us.
Our interviews involved ?rst asking unstruc-
tured open-ended questions that allowed the inter-
viewees to freely describe their negotiation roles,
relationships and settings. Table 2 contains the
interview protocol. The questions in Panel A are
open ended and allowed the interviewees to high-
light the factors that were important to them with-
out our leading them to what we might think were
the important aspects of their experience.
The questions in Table 2, Panel B were drawn
from the previously published research on the
auditor–client management negotiation process
(e.g. Gibbins, Salterio, & Webb, 2001). If a ques-
tion in Panel B was answered by the interviewee
in the course of responding to Panel A’s questions,
we did not ask the Panel B question, unless it was
to clarify something that arose in the previous por-
tion of the interview. The 16 interviews, with one
20-min exception, took from 45 to 75 min. All
interviews, but the one shorter CFO interview,
were carried out in a relaxed conversational tone
with no pressures from the interviewee for us to
?nish quickly. All interviews were taped with the
permission of the interviewee and transcribed by
an independent transcription professional. One of
the authors read the draft transcripts while listen-
ing to the tapes and reconciled any discrepancies
with the transcriptions. Finally, all transcripts
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 369
were returned to the interviewee for approval of
factual accuracy and only minor changes resulted.
The data analysis undertaken adapts methods
proposed by Eisenhardt (1989) and Anderson
(1995). The interviews were reviewed to identify
key themes brought out by the interviewees as
being important to their negotiations. First, one
of the researchers and a research assistant each
read the transcripts in three di?erent random
orders: only CFOs, only audit partners, and the
CFO–audit partner dyad. Once the coders had
completed the coding for the three interview sets;
the two coders met and discussed their individual
thematic ?ndings. Approximately 80% of the
themes or patterns had been identi?ed by both
coders. The coders then went back and reviewed
the interviews and their codings one more time in
light of their discussion. At a ?nal meeting, the
coders reached consensus through discussion
about the themes and patterns identi?ed.
Next, we returned to each company’s archival
data (annual reports, analysts’ reports, news arti-
cles, including material disclosed since our inter-
views) and re-read them in light of this analysis
to see if there were suggestions that our analysis
was inconsistent with the archival records. While
we found hints of the issues negotiated and the dis-
closures made both in regulatory ?lings and in
webcasts with ?nancial analysts, we found no
reports that suggested our analysis was con-
tradicted by the archival records.
The triangulation made possible by multiple
data-collection methods across multiple dyads
provides for strong substantiation of constructs
Table 2
Interview protocol for CFOs and audit partners
Panel A – Open-ended questions
1. How does the process of ?nalizing the ?nancial statements with [auditor or CFO] usually work?
We are interested in situations where a measurement, valuation or disclosure issue complicated the process of ?nalizing the
?nancial statements because you and [auditor or CFO] had di?erent views about handling (or not handling) an issue or issues
in the ?nancial statements
(prompts to elaborate)
2. To make the interview concrete, please think of such an issue you have experienced. Now, please describe the issue and what the
di?erent views on it were.
(prompts to elaborate)
3. Now please take several minutes to tell us how the issue arose and how,
if at all, it was ?nally resolved.
(prompts to elaborate)
Panel B – Questions based on Gibbins et al. (2001) model
Would you please elaborate on your comments by answering a few questions about the issue? These are questions we would like
to use to triangulate the situation you were in, so, again, we seek only your own experience of each.
4. Details about the issue:
(a) How and when did this issue arise? Was there more than one issue dealt with during the same negotiation?
(b) Why was this an issue?
(c) What was your view on this issue? Why? What was in?uencing your view?
(d) What was [auditor or CFO] view on this issue? Why do you think he/she had this view? What was in?uencing his/her view?
(e) Whose interests were a?ected by the proposed adjustment to the ?nancial statements?
(f) Was there a range of acceptable outcomes or were there just two options?
(g) Was there a search for a compromise?
(h) Was there a search for a new outcome?
(i) Were you satis?ed that the ?nalized ?nancial statements re?ected the economic reality facing the company?
5. What approaches did you employ to convince [auditor or CFO] that your position was acceptable?
6. What arguments or pressures did [auditor or CFO] employ to convince you to adopt his/her position?
7. What other parties (internally to the ?rm, e.g. other executives/Board/AC and externally, e.g. creditors/regulators/shareholders)
were involved? How did they impact the resolution of the issue?
8. Describe your relationship with the [auditor or CFO] and his/her audit ?rm/company? Are there any other members of the audit
?rm/company, beside the [auditor or CFO], who are important to your relationship with the audit ?rm/company?
Anything else you would like to tell us?
370 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
and theoretical development (Yin, 1994). In sum, a
number of steps were taken to ensure the trustwor-
thiness of this qualitative ?eld study. Table 3 pre-
sents an overview of e?orts directed at enhancing
the trustworthiness of our data analysis. One
might argue these short interviews can provide
only limited insight, especially in light of the rich
tradition of qualitative research that generally
requires multiple points of access over an extended
period of time (e.g., Radcli?e, 1999 but see Gen-
dron, 2002 for more limited access).
7
However,
given the paucity of research in how audit and
accounting decisions are made (Cooper & Robson,
2006), the rich background archival research we
collected prior to each interview and the analytical
process we carried out, we believe this interview
set allowed us to examine the roles, relationships,
and their e?ects on accounting negotiation.
Indeed, the only other study in this area (Beattie
et al., 2004) was con?ned to examining structural
determinants of relationships (e.g. age gap
between CFO and partner) without examining
how the relationship was negotiated and with no
contextualization of the roles within the
relationship.
Analyses of roles and relationships
A key claim in the social positioning negotia-
tion perspective is that the negotiation does not
‘‘exist out there’’ waiting to be discovered, but
rather is part of a socially constructed process that
can be quite ‘?uid’ (Kolb, 2004a). All our intervie-
wees described the negotiation process as evolving
over time. The ‘facts’, issue context, parties’ posi-
tions, justi?cations and supporting accounting
research cited changed as the information set was
enlarged, shared and (re)interpreted during the
course of the discussions. Company D’s audit
partner described the process as
We discuss it and we start o? by saying we’ve
got this issue. Our ?rst reading says that
we’re probably going to have to have to do
it like this but I want to hear what you want
to do. ‘‘I don’t want to do that, I want to do
this.’’ Kind of look at the distance between
the two and say OK, lets start ?guring out
Table 3
Criteria and procedures for enhancing trustworthiness of data analysis
Criterion for trustworthiness Procedures undertaken
Credibility In-depth interviews separately with CFO then the audit partner with no evidence that they
corroborated in their responses
Triangulation of observations:
• Use of public archival material – news accounts, annual, quarterly reports etc.
• Across dyads
• Across same issues and di?erent issues
• Listening to CFO webcasts with ?nancial analysts in same time periods as interviews
took place
• Segregation of data gathering and data interpretation functions
Respondents reviewed interviews for accuracy
Transferability Sampling:
• Eight dyads
• Five common issues in relationships plus three additional relationships with di?erent issues
Thick description of issues
Dependability and con?rmability Triangulation of observations
Verbatim transcripts of recorded interviews as primary data. Primary data supplemented
by ?eld notes and archival data
Audit trail from data to ?ndings and copious use of primary sources
Note: This table is adapted from Basu et al. (1999).
7
In negotiation research Power (2003) featured 38, one hour
interviews and 2800 pages of ?eld notes from meetings observed
in addition to considerable assess to archival records.
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 371
what it all means and eventually we’ll start
documenting. But documenting, it’s more
reading and discussing and you know, here
read this note. Here’s an analysis, like a
working paper that kind of looks at the num-
bers and pros and cons and that sort of thing
but it’s not a formal documentation. . .. Posi-
tions change, thinking changes and what you
really want to do is get to the end and docu-
ment the process you went through and your
end conclusion in a formal fashion that you
can later come back to and say yes, that’s
what we did. And so in the end he would
get a memo on this.
Company F’s audit partner summed up how the
negotiators’ perspectives change over time and
how the resolution depends on this:
And so they consulted us early on saying
they were concerned, they don’t, they haven’t
gotten to the bottom of the issue but as they
look at the numbers they’re starting to ques-
tion as to whether they’ve been assembled in
the appropriate way. So we, the ?rst part of
that was to help them with a strategy to get
to the answer which was you know, now go
back and look at how this has been devel-
oped and see if you can re?ne your thoughts
on the issue. And at the same time, we’ll do
some research as to what is the appropriate
step to take, if in fact that is the case. So
they, we had kind of a parallel process. They
worked on the details of the numbers and we
worked on the statutory process and the dis-
closure processes that would surround the
correction. And ultimately they concluded
with us that the problem was not signi?cant
that really what had happened was there
had been a change in the business which as
a result if you were to stand at a position
today and look back, it doesn’t look the
same as what you’d see going forward but
that is because of business change, not
because there was an error in the way they
rolled up the numbers.
The discussions frequently went back and forth
between (re)conceptualizations of the issue, the
(re)analysis of the issue, and the information
exchanges that took place. For example, in Com-
pany E, contract language that had been described
as unambiguous in intention when the CFO
explained his reason for accounting was found to
be unclear with a more detailed reading of the con-
tract and the involvement of lawyers. This recon-
ceptualization of the issue lead to an enlargement
of the set of authoritative literature examined as
well as more conceptual discussions about whether
the payment was deferred revenue or a loan.
The discussion related to the negotiation con-
text, such as motivation, preferences and power,
also had no set location, being discussed at the
outset, in the middle or near the end, and often
in more than one place in the interview. This
non-sequential process is consistent with the social
positioning concept of negotiation ‘?uidity.’ It
appeared fundamental to the eventual resolution
of the issue: all the interviewees believed discussion
and ongoing dialogue were important to the reso-
lution. This ?uid process of issue identi?cation,
mapping of issue ‘facts’ to accounting standards
and other regulations, and rede?ning the issue
due to a deeper understanding of ‘facts’ and conse-
quences is not found in the questionnaire or exper-
imental literature on accounting negotiation (e.g.,
Gibbins et al., 2001; Trotman, Wright, & Wright,
2005).
Positioning in roles and relationships
We start our analysis with how we came to see
the relationships through our thematic analysis of
our interview data. We then relate it to the lens
provided by social positioning research on
negotiation.
The ?rst relationship type we discuss is what we
call a ‘proactive’ relationship, where the CFO con-
sults the audit partner throughout the year with
the goal of dealing with potentially contentious
issues at an early date and producing a no-sur-
prises audit. As one audit partner in a proactive
relationship (A) stated, ‘‘So it’s a good working
relationship that way. We’re set for speed dial,
we talk to them I would say once a week about
something. So it is very open and the issues were
on the table.’’ The ?nancial statements tend to be
372 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
viewed as a joint product or ‘‘our’’ statements; in
other words the audit partner ‘‘co-creates’’ them.
The CFO values the audit partner’s opinion and
asks for advice on accounting and disclosure treat-
ment in the early stages of developing the com-
pany’s position, often prior to consummating the
transaction or making the estimate. In these rela-
tionships, the CFOs stated they want the ?nancial
statements to be ‘‘right’’ and to be able to stand up
to detailed scrutiny. Company A’s CFO described
the audit partner, his role and their relationship as
He is di?cult, he’s ornery, but we love him
because he is brilliant. He is very risk averse
and that’s what we want in an auditor. We
don’t want the guy that says OK that’s
?ne. . .. And again, I think because we actu-
ally encourage the auditors on that
basis, we encourage the audit partner on that
basis – don’t let us make a mistake, knowing
or unknowing. Don’t let us make a bad judg-
ment, knowing or unknowing. And so
because of that there is that level of
understanding.
The audit partner described his role as ensuring
that the ?nancial statements are beyond reproach
in their adherence to GAAP, especially in the eyes
of ?nancial analysts. In these relationships, even
when negotiations do not go smoothly, the rela-
tionship is described as not being harmed and
the two sides work together to attain the ‘‘best’’
?nancial reporting. In these relationships, neither
side reported instances of open con?ict, discord
or threats. Nonetheless, as their examples illus-
trated, a ‘‘heated’’ negotiation can occur, given
that two accountants can have di?erent views on
the same transaction (Gibbins & Mason, 1988).
One ‘‘heated’’ negotiation was described by the
CFO of Company A:
I think it’s a tribute to the company that you
can have management thoroughly frustrated
with the issue, the audit committee to a per-
son thoroughly frustrated with the issue, and
the board, and yet the position that the CEO
took and I took was well let’s go with the
auditors for the quarter. We’ll communicate
it as best we can. The likelihood is we will
take more heat than we deserve to take in
terms of how the market reacts to it. But
that’s the right thing to do in the circum-
stance. . .. I think you are always trying to
do this so that the ?nancial community has
the best view of the real results of the
company. . .
Companies A, C, D and H’s relationships exem-
plify this proactive relationship type.
The other relationship type we denote as being
‘reactive’. The themes that characterize this rela-
tionship type include: the company has a position
on accounting for the issue that is known by many
senior managers and potentially by board mem-
bers, the audit partner is not informed about the
issue until after any transaction has taken place,
and the accounting issues are almost always being
dealt with after year-end or, if a formal quarterly
review is done, at the time of the quarterly review.
In the reactive companies, management had given
earnings guidance to the market analysts and
senior executives, without consulting the auditor
on this major issue, so what may have originally
been a less important issue that could have been
easily resolved became the focus of a serious nego-
tiation, due to the CFO’s commitment to his initial
position. The CFO of Company B con?rmed com-
mitments as potential problems:
I mean, I said this is my position and it was
pretty clear that you know, unless they made
me do it, and it was absolutely required
under GAAP, i.e., it’s material, or GAAS
even more so, then I wasn’t going to change.
I said my number has already been published
for the quarter. We do a quarterly release at
the end of February and then two months
later we have our audited, or a month later
we have our audited statements. If they’re
not the same then there’s a real issue. It
becomes a matter of credibility and all that
stu?. Unless it’s absolutely, fundamentally,
qualifying material, then I won’t change.
The audit partner of Company E provided a
similar analysis:
And so when they are falling short of the
guidance, they tend to look for things that
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 373
may have [been] overlooked in the normal
accounting process. And that was the real
motivation here – is to look at it and say,
okay something has fallen outside of the nor-
mal process. . .. I think the motivation, the
overall motivation is to try to preserve the
credibility of the guidance.
8
These CFOs rarely involved the audit partner in
deciding how to account for a major transaction.
When we asked about involving the audit partner,
Company G’s CFO explained, ‘‘Well I don’t think
we do in the normal course. We simply go on, and
again, unless we feel somewhat unsure of what we
are doing, we wouldn’t. We would just go on and
do it.’’ In a reactive relationship, the audit partners
reported that they have a smaller role in shaping
the client’s ?nancial reporting than do auditors
in proactive relationships. The auditors in reactive
relationships described themselves as making sure
that the ?nancial statements were GAAP-compli-
ant in all material respects, but with these CFOs,
they do not suggest or advocate a conceptually
sounder approach or one that is consistent with
most companies in the industry (the so-called ‘best
practice’). For example, when the audit partner for
company G was asked about his approach to
resolving the issue and whether he would push
for more clear and concise disclosure and recom-
mend how other companies had handled the dis-
closure, his response was: ‘‘We didn’t get into, I
would have if necessary, but no we didn’t get into
that degree of involvement. It was more just, you
know, here’s what looks like a practical solution’’
and ‘‘we shall listen to the personal preferences [of
the CFO]’’ and ‘‘if we can’t challenge them, then
they [the CFO] should hold the day. . . We don’t
look at things as right or, right or wrong.’’ In this
instance, after considerable work, the audit part-
ner found support for the CFO’s preferred posi-
tion and accepted that position. There was an
emphasis in all of these dyads (B, E, F and G)
on the audit partner ?nding justi?cation for the cli-
ent management’s accounting policy selection (see
Salterio, 1994; Salterio, 1996 for discussion of the
audit ?rm’s national o?ce supporting this
approach).
9
‘Moves’ and ‘turns’ in positioning
Having described the then-existing relationships
in our eight dyads, we now examine how the roles
were de?ned in these relationships. We make this
separation for analytical purposes only, recogniz-
ing that role and relationship are intimately inter-
twined with each other. In this analysis, we ?nd
evidence of several types of ‘moves’ made by the
CFOs, countered by several ‘turns’ by audit part-
ners, but can ?nd only one clear ‘move’ made by
the audit partners.
Overall roles
In all our dyads, it was clear that the audit part-
ner was the ‘relationship manager’, no matter what
the relationship. Indeed, audit partners consis-
tently described their role as one of developing
or maintaining a ‘‘good’’ relationship. They
emphasized that ‘‘keeping the CFO happy’’ is
important to the audit partner’s job. If the CFO’s
accounting is not accepted by the auditor, the
audit partner and the CFO expect that the audit
partner will repair the ‘‘damage’’ to the relation-
ship. The audit partner of Company G, who was
brought in to repair a damaged reactive relation-
ship, summarized his role as
Well, as one of my responsibilities as the
audit partner is also to be the relationship
partner for the ?rm and what that really
means is to get to know the senior manage-
ment of the company, understand their
issues, understand their needs and to make
certain that [my ?rm] as an organization is
properly serving the company.
8
Italics are added to quotes only if clari?cation is needed.
9
The various codes of professional conduct for chartered
accountants in Canada have recently been amended to prohibit
any chartered accountant from being associated with a GAAP
position that is described as ‘‘false or misleading’’ or any
‘‘extreme interpretation of GAAP’’ and apply to all CAs, not
just those in public accounting (ICAO, 2004b).
374 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
Threatening to end the relationship
The CFOs’ beliefs about how the relationship
should work, and their actions implementing those
beliefs, contribute to positioning the audit partner
as responsible for creating and maintaining a
‘‘good’’ client relationship. In addition, audit part-
ners reported that audit ?rm management actively
attempts to match an audit partner to the CFO,
based on the readiness of the audit partner to
accept the CFO-preferred role. If the CFO desires
a reactive relationship with the audit partner, but
the audit partner (in an ‘expert advisor’ role) consis-
tently promotes best practice accounting, objects to
the CFO’s desire for accounting that is in minimal
compliance with GAAP, and pushes early adop-
tion of preferred GAAP that will be mandatory
in future periods, the audit partner likely will be
replaced by the audit ?rm. Furthermore, if the
audit ?rm does not change the partner, the CFO
can ‘move’ to put the audit out for tender, as evi-
denced by actions reported in the Company F
dyad. From the view of the audit partner, both
the audit ?rm and the CFO actions can be consid-
ered as a ‘move’ consistent with the ‘‘threaten to
end the relationship’’ ‘move’, documented in social
positioning negotiation research (Kolb, 2004b).
In three of our interview companies (E, F and
G), where the CFO desired a reactive relationship,
the audit partner had been recently replaced by the
audit ?rm with the partner we interviewed. Audit
partner D described a relationship before removal
as, ‘‘And then you end up in ?ghts. And in the end
you become a policeman instead of an auditor.
And you just say no and it’s too damn bad if they
don’t like it. And you get ?red sometimes’’. The
CFO of Company G, who instigated an audit part-
ner change, described it as
And it got to such loggerheads that we in fact
did have a change in the engagement partner
the following year. Because I come back and
say that in a good relationship, with good
open communication, and good open dia-
logue, you should never get to that point.
You should always be able to resolve these
issues. Where you get a position like that,
then you’ve got a problem with chemistry
and dialogue and communication.
The audit partner for Company G described the
process of partner replacement:
When the previous partner was on the
account, I was the concurring partner on
the engagement. And I was the concurring
partner on the engagement because I had a
lot of [X industry] experience so I understood
the industry. I understood the business.
When [Company G] were looking to change
[the existing partner] on the engagement,
really it came down to who would probably
be the right ?t, sort of personality wise, num-
ber one. Number two, who has the proper
industry experience to be able to deal with
this company. And it came, it really came
down to, and I’m not sure internally there
was a lot of discussions because I think when
we talked about it. So it just made logical
sense that I would take it over. And I think
that was sort of the process. We had to move
quickly because I think they were serious
about us reacting real quick. So it just sort
of, everything sort of fell into place but it
wasn’t trying to ?t a square peg into a round
hole. It was more like well here’s the guy that
would make the second most sense to take
over this account.
In these three dyads (E, F and G), the CFOs’
expectations and actions, combined with the
response of audit ?rm management, resulted in
the removal of the existing audit partner, who
was actively resisting being party to a reactive rela-
tionship, from the engagement. The importance of
CFO expectations about the relationship was also
evident in the case of Company A. In this case, the
opposite exchange of partners took place, as the
CFO’s expectations led to an accommodating
audit partner being removed from the audit by
the audit ?rm. The Big 5 audit ?rm had a policy
that mandated audit partner rotation, hence the
previous expert advisor audit partner who had a
proactive relationship with the CFO was replaced.
The CFO stated that he was concerned that the
new engagement partner was too accommodating
of the company’s wishes, leaving the company
potentially exposed to negative publicity, due to
the possibility that the company would inadver-
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 375
tently adopt aggressive, but GAAP compliant (i.e.
acceptable without question by a ‘police o?cer’
auditor), accounting. Company A’s CFO insisted
that the audit ?rm’s management assign a partner
comfortable with a more proactive relationship to
their audit, in order to ensure Company A’s
accounting was beyond reproach. The audit ?rm
assigned such a partner, one described by the
CFO as ‘‘ornery’’, and both sides described the
relationship as being much improved.
Overall, irrespective of the relationship, the
CFOs’ expectations for the audit partners’ role in
their relationships is reinforced by the audit ?rm’s
management, via its partner assignment process.
Further, from a theoretical perspective, we can
see that one way that the CFO can position the
auditor in the relationship is via the ‘move’ of
employing threats of relationship change (either
to the audit partner or the audit ?rm).
In addition to the three examples where expert
advisor partners who sought proactive relation-
ships with the CFO were replaced, some partners
in proactive relationships told us they preferred
proactive relationships and were willing to lose a
client rather than be positioned as an auditor in
a reactive relationship. The audit partner for com-
pany D described why he prefers his proactive
relationship by comparing this ideal proactive cli-
ent to typical reactive clients:
The ideal, this is the ideal, this is the ideal. I
wish all clients operated on this basis. They
don’t. Often we come in, we get to year-end
and go oh my God, you know, what have
you been doing? Why didn’t you call us? This
and this and this is a problem. And you
know, then that makes us really mad because
it’s last minute and it’s ?ve problems at once.
And you know that the debits were going in
one direction and the credits in the other.
And it’s always bad news. It’s never good.
So, no, this is the ideal.
The audit partner of company H also explained
why she preferred proactive clients, ‘‘I would say
it’s an open and consultative relationship. I think
that [the clients in these relationships] trust the
advice that we give them and they turn to us as
an advisor to help guide them through.’’ She con-
cluded by indicating that the expert advisor role is
a preferred, less risky role for the audit partner.
Hence, it appears that on some level our audit
partner interviewees perceived the CFO actions
and expectations as to how the auditor should
act as being ‘moves’ that placed them in a speci?c
role and relationship.
Challenges to accounting expertise
Another ‘move’ revolved around the CFO posi-
tioning the audit partner as the lead in information
search and issue resolution. Despite this role
assignment, in some dyads the CFOs (A, D, E,
F-CFO, F-A/P and G-CFO) explicitly requested
additional consultation with the ?rm’s national
o?ce technical accounting unit (see Salterio &
Denham, 1997 for description of these units). Four
of the CFOs (A, D, G-CFO and H-A/P) wanted
to, and did, speak directly with the national o?ce
technical people, typically involving the engage-
ment partner. Company D’s auditor described
the role of the national o?ce as ‘‘to help us arbi-
trate’’ the issue resolutions. Results of these con-
sultations, especially when they resulted in
accounting di?erent than that advised by the audit
partner, implicitly challenged the partner’s claim
to accounting expertise (Power, 1997a) and under-
mined his ability to negotiate this issue and subse-
quent issues.
Audit partners exhibited great concern that the
national o?ce be on ‘‘the same page’’ as they were
prior to the consultation, implicitly recognizing
that the CFO ‘move’ of asking for a national o?ce
consultation was a challenge to their accounting
expertise. In fact, often the audit partner went to
the national o?ce prior to the CFO’s asking and
ensured that the national o?ce was ‘‘on side’’, in
order to present a united front. For example, the
audit partner of Company F, who had talked to
the national o?ce prior to the CFO’s requesting
it, explained the role of the national o?ce and
his view of the group:
I personally view our national o?ce as a sup-
port group. . . I’m pretty sure they were
involved at some point in time because,
again, it was a new area, looking for other
precedents of how other people had applied
376 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
to it. So we would have identi?ed the issue
ourselves and they would have supported
us in our discussions.
Similarly, the audit partner of Company D
explained how he uses the national consulting
group, ‘‘We talk [to national o?ce] and we say
OK, this is our position.’’ Here the audit partner
is attempting to circumvent or ‘turn’ this tactic
by determining national o?ce support for his posi-
tion. Hence, while the ‘move’ by the CFO to ask
for national o?ce consultation can challenge the
audit partner’s claim to expertise (Kolb, 2004b)
the audit partner can attempt to ‘turn’ it by con-
sulting national o?ce in advance of the client.
This attempt to prepare for such a ‘move’ can
be circumvented by the CFO. For example, Com-
pany G’s CFO directly contacted the national
o?ce himself to get the result he wanted:
Once when we had a situation and where the
partner was taking a very, very hard stand on
his particular interpretation of an emerging
issues release which I totally disagreed with
which led to a change in the partner the fol-
lowing year. I discussed it with their national
o?ce who, interestingly enough, took a
softer view of the interpretation than he
did. And it got to such logger heads that
we in fact did have a change in the engage-
ment partner the following year.
Interestingly, in this situation, when the audit
partner did not get support from the Canadian
national o?ce, he attempted another ‘turn’ by
escalating the issue to the international o?ce of
the audit ?rm. While the audit partner found lim-
ited initial support from the international o?ce,
the CFO described the outcome as, ‘‘Obviously
when push came to shove and this started to get
to the point where it had to be resolved, they
[the parent company national o?ce] didn’t see it
as hard and fast as he did’’ and thus, the CFO’s
position prevailed.
In the other cases, the CFO preferred not to
deal with the national o?ce sta? directly. The
auditor for company F explained, ‘‘[The client]
didn’t really want them [i.e., the national o?ce]
to be involved either. There are certain cases where
the client wants to deal with them, other cases
where the client wants to deal with us.’’ Again,
the audit partners at some level see the CFO
attempting to make a ‘move’ by the CFO’s choice
of whether to ask for national o?ce consultation.
The audit partner does not always necessarily
accede to the CFO’s wishes. Company D’s audi-
tor, referring to other engagements, stated that
with some clients, ‘‘We talk [to national o?ce]
and we say OK, this is our position. They don’t
directly deal with the [national o?ce] guys.’’ or
indeed know that the audit partner consulted
national o?ce. This again provides evidence that
the auditors can also perceive the CFO’s action
of not wanting national o?ce consultation as a
‘move’, with the partner seeking to ‘turn’ the situ-
ation by consulting anyway.
Challenging the underlying ideas
Another ‘move’ that the CFOs seem to com-
monly undertake is to complain extensively that
?nancial accounting does not take into account
the underlying economic substance of the transac-
tions in which their companies are engaged. For
example, Company A’s CFO was completely frus-
trated with the accounting treatment required for
the issue. Indeed in this case the CFO
enlisted the CEO, Board and audit committee to
challenge the audit partner’s position, based on
the lack of economic reality allegedly embedded
in the relevant accounting standards. The CFO
stated:
We probably had three meetings on it. They
produced a lot of literature research, they
produced actually from another transaction,
had another ?rm’s opinion on the range of
the way these kinds of convertible instru-
ments should be treated. . .. So there was a
lot of back and forth and there was, like I
try to keep the discussions more on the prac-
tical business side then is it paragraph 3 or 9
of this, because I trust [the] people that we
have internally plus the partner. . .. I mean,
they did an extensive amount of homework
on it. They searched other companies, we
forced them to go back and search more
companies, which they did and they reported
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 377
on. And so once they convinced me on the
issue and rami?cations of the issue then out
of a three hour board meeting we probably
spent almost an hour talking about this. . ...
he (the audit partner) was explaining it to
the three or four members of the audit com-
mittee in a lot of detail and so. . . for sure
they (the audit ?rm) felt a lot of pressure, per-
sonally, because they knew they were coming
up with an illogical result and they knew
again, that one, it was important to us and
two, none of us thought there was any kind
of logic involved in what the outcome was.
So it was more of, I think, of a personal long
term relationship pressure that they felt.
By describing the standard’s result as ‘‘illogi-
cal’’, the CFO is attempting to position the audit
partner via the claim that ?nancial accounting is
all about rules and is not about communicating
the economic reality of the transactions engaged
in by their companies. By questioning the underly-
ing accounting standards, the CFO is undermining
the auditor’s strongest position and arguments.
This ‘move’ is similar, in principle, to the ‘move’
of ‘‘demeaning the other side’s ideas’’ (Kolb,
2004b) identi?ed in social positioning research on
negotiation. After all, why bring a perfectly good
relationship into question over something as
pedestrian as accounting rules? Company F’s audit
partner illustrated how CFOs employ this
approach:
Their arguments were really a substance over
form type argument. So they were arguing
the substance of the transaction as such that
it should be presented in this way and that
unfortunately the rule’s very form driven
and would result in a di?erent result. So
[the CFO] is very much a substance over
form type of person. So his arguments were
largely from an economic, economic reality
view point, substance over form type view
point.
The auditor’s ‘turns’
It appears that the audit partners accept that the
CFO has agency in the relationships and ?nds the
CFOs’ ‘moves’ to be acceptable in the context of
the relationship type. In addition to the auditor
‘turns’ discussed previously, one of the main ‘turns’
documented in the social positioning literature is to
refocus the discussion on the substantive negotia-
tion issue. We found that the auditor frequently
‘turns’ the discussion towards the accounting stan-
dards and interpretations where the auditor gener-
ally has the expertise advantage. Company D’s
audit partner explicitly described that in reactive
relationships he has been in, the audit partner func-
tions more like a police o?cer enforcing the ‘‘stan-
dards.’’ In cases of clearly non-GAAP accounting,
the audit partner’s ‘turn’ involves the implicit or
explicit response of threatening to qualify the audit
report. This approach was con?rmed by the CFOs
in reactive relationships who consider the ?nancial
statements as theirs, and thus, will not change their
statements for anything short of a quali?cation. As
Company B’s CFO stated, ‘‘Unless it’s absolutely,
fundamentally, qualifying material, then I won’t
change.’’
The auditor’s ‘move’
While all audit partners in reactive relation-
ships volunteered examples of how they had pro-
active relationships with other clients and
maintained they were undertaking steps to change
the present reactive relationship towards a proac-
tive one, they indicated that it takes time for a
relationship to mature into a proactive one.
Beyond this waiting for a relationship to mature
or knowing the CFO ‘‘better’’, we could not ?nd
other ‘moves’ that the audit partners were taking
to position the CFO into accepting a more proac-
tive auditor role. Indeed, as illustrated in three of
our dyads, a previous audit partner pushing for a
more proactive relationship led to audit ?rm man-
agement removing that partner from the engage-
ment. Hence, it appears that the CFO in auditor
client management negotiations has the ability
to make strong ‘moves’ to position the auditor’s
role in the relationship, whereas the auditor has
no ‘moves’ to position the CFO. Furthermore,
the audit partner replies to the CFO ‘moves’ with
‘turns’, only if absolutely necessary, hence putting
the auditor on the defensive at the start of many
negotiations.
378 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
E?ects of the ‘shadow’ negotiation on the
substantive negotiation
This section examines the e?ects the ‘shadow’
negotiation can have on the negotiation over sub-
stantive accounting issues hinted at but not
explored so far in our analysis.
Process
As illustrated by our analyses, the relationship
de?ned by these underlying negotiations deter-
mined when the issue was identi?ed, the role the
audit partner was to play, how both sides pre-
sented their arguments, and the nature of the pro-
cess required to resolve the issue. For example, in
the dyads where there is a long-term proactive
relationship between the CFO and audit partner,
both parties claimed they could quite easily predict
the other side’s position, arguments and bargain-
ing strategy. The CFO of Company C captured
this when describing how the audit partner dealt
with the issue, ‘‘We’ve got a great working rela-
tionship, he knows where we’re coming from . . .,
and we both know that neither of us are going to
screw each other.’’ In contrast Company E’s audit
partner, who had just become the engagement
partner, observed that for this client the relation-
ship is ‘‘. . . not particularly well developed at this
point in time. So . . .we are still learning how to
work with each other and so it’s a bit tentative.’’
Our analysis of the descriptions of the negotia-
tion process given by both parties indicates that
reactive dyads had a much more di?cult time
negotiating. In particular, for the two issues dis-
cussed for Company G, the CFO was entrenched
in his position and would not even contemplate lis-
tening to the audit partner’s view. For example,
when describing the audit partner’s position and
viewpoint, he stated, ‘‘Oh, yes. He absolutely went
away and thought about it. And then came back
with the wrong answer.’’
This is not to say, however, that all areas of the
substantive negotiation process di?ered due to
relationship type. The theme of the parties sharing
their starting position and research with the other
party, once the issue had been identi?ed by both
sides, was consistent across both types of relation-
ships. All dyads, except Company G, described
themselves as working collaboratively to resolve
the issue. In all cases, both parties claimed they
kept each other informed on a ‘‘timely’’ basis, even
in the reactive relationships, although what is seen
as ‘‘timely’’ di?ered greatly between the dyads in
reactive and proactive relationships. The auditor
for Company F, in a reactive relationship, stated,
‘‘We would provide our interpretation [account-
ing]. He would provide us more information [about
the transaction]. . .So it’s an iterative process.’’
Potential solutions considered
The proactive/reactive nature of the dyadic
relationship shaped the types of alternatives for
which the audit partner would search. In the pro-
active relationships, we found the emphasis was on
information gathering to determine the interpreta-
tion of GAAP that was most appropriate and
defensible to third parties. In the reactive relation-
ships, the auditors indicated that they ?rst
searched for information to support the CFO’s
position or desired accounting outcome. For
example, Company B’s auditor (reactive relation-
ship) stated that ‘‘we did look for . . . compensating
[items], I mean he did. . . . We had a couple of other
issues which we were going to pass on but they got
him part way back to where he wanted to be on
this earnings per share.’’ Company D’s CFO,
summed up his view of the reactive process:
We exchanged views on it. I suggested that
this is a new area and we are one of the ?rst
ones o? the block and I said I know another
company, a well-known company in the US,
who made some major acquisitions, can you
please go look and see how they did it and I
don’t think, we don’t need to necessarily, I
don’t believe we are the ones inventing the
wheel here but this is my interpretation and
I’m sure as a business person this is how I
think people will globally interpret it. So they
agree after the meeting to do some more
research and in the end they came back and
they supported our position. They said no,
your interpretation of that is correct and
they’ve seen some information on it and they
are comfortable in the end with resolving the
issue.
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 379
In this description, there is no consideration of
whether this is the most appropriate, defensible
or the ‘best practice’ interpretation of GAAP. As
long as someone else had done it and the resulting
accounting is in accordance with the CFO’s wishes,
information search and analysis ended when such
an example was found (see Salterio, 1996 for archi-
val collaboration of this point). Thus, once again
this demonstrates the CFO’s desire for the ?nancial
statement to represent economic reality, not just
compliance with the ‘‘misleading’’ rules. The argu-
ment is that if others are doing it, it must be okay
and probably better communicates the results –
who cares about GAAP?
Overall, our interviews show that the ‘shadow’
negotiation a?ects what happens in the substantive
negotiation process, especially in the set of alterna-
tive resolutions considered, including the alterna-
tives that the auditor brings forward to the
negotiation table.
Conclusions: expanding our understanding of
accounting negotiation
This paper is the ?rst to examine the ‘shadow’
negotiation of the relationship and roles that takes
place simultaneously with the negotiation over the
substantive issue in the accounting setting. This
research provides new insights into both how the
roles and relationship are (re)negotiated and the
CFO’s commanding position in that process.
By focusing on the dyadic negotiation setting,
as opposed to the individual parties, our research
adds to the general body of knowledge about
accounting negotiation. First, we ?nd that the
audit partner’s overall role, both in the eyes of
the partners and CFOs, was to manage the rela-
tionship so that it would be considered ‘‘good’’
by both parties. Second, there appear to be two
principal types of relationships between CFOs
and audit partners, proactive and reactive, with
both relationship types determined by the CFO’s
expectations and shaped by his actions. Those
dyads that we characterize as being in proactive
relationships feature a CFO who consulted with
the audit partner as soon as he identi?ed a poten-
tial issue with the goal of ensuring accounting and
disclosures that were beyond question by third
parties, like ?nancial analysts. Those dyads we
characterize as being in reactive relationships fea-
ture CFOs who wait until year-end or later to tell
the auditor about an issue, if the CFO tells the
auditor at all. In the former case, the CFO is delib-
erately ceding agency (Kolb, 2004b) to the audit
partner and bestowing on the auditor the power
to ensure compliance with all reasonable interpre-
tations of GAAP. In the latter case, the CFO
actively contests any proposed changes in his
accounting and actively challenges the legitimacy
of the auditor’s position.
Third, as a result of the audit ?rm’s emphasis
on ‘‘happy’’ client management, in three of our
dyads, the audit partner, who was attempting to
change the relationship towards a more proactive
one, was replaced by the audit ?rm, with a partner
willing to accept the reactive relationship and the
police o?cer role. In two of the three dyads, this
replacement was achieved by the CFO complain-
ing; in only one dyad did the change occur due
to the CFO putting the audit out to tender. The
complicity of audit ?rm management in respond-
ing to the CFO wishes is illustrated as well by
the ?rm’s response to the dyad where, at the
request of the CFO, a more accommodating audit
partner was replaced with a partner who would
only deal with clients in the context of an expert
advisor role in a proactive relationship.
Fourth, our analysis shows that the CFO has
several ways to ‘move’ the auditor role towards
what the CFO wants in a relationship. Besides
the threat to end the relationship, the CFOs can
challenge the audit partner’s accounting expertise
by strategically asking for a second opinion from
the audit ?rm’s national o?ce as well as attacking
the underlying importance of GAAP based
accounting by claiming it was ‘‘illogical’’ and not
re?ective of economic reality. The auditor may
attempt to ‘turn’ these ‘moves’ by consulting the
national o?ce before the client asks and employ-
ing his accounting expertise to document, in depth,
the general acceptance of the so-called ‘‘illogical’’
GAAP, or the audit partner might even go further
by going to the international o?ce if the national
o?ce is not onside with his views. Fifth, while
the auditor exhibits some responses to CFO
380 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
‘moves’, the audit partner does not seem to have at
his disposal e?ective ‘moves’, other than the pas-
sage of time and getting to know the CFO better,
to position the relationship to the auditor-desired
‘‘ideal’’ proactive relationship.
Overall, we can see that the ‘shadow’ negotia-
tion exists in the audit realm and can sometimes
lead to the auditor being put in a defensive position
right from the start of the substantive negotiation.
Audit partners in reactive relationships have to
carefully weigh the seriousness of the accounting
issue against the damage a confrontation would
have on the relationship with the CFO. Police o?-
cer auditors in this type of relationship are charged
with ensuring their clients ?nancial statements
comply with minimal technically correct GAAP,
rather than quality or appropriateness of the
accounting or disclosures. On a more positive note,
expert advisor auditors in proactive relationships
are given the responsibility of ensuring that the
?nancial statements are beyond reproach, with
the CFOs somewhat ceding responsibility for high
quality ?nancial reporting to the audit partner.
One requirement of the U.S. Sarbanes-Oxley
Act (SOX) that may give an auditor a new ‘move’
to employ in positioning the relationship with the
CFO is the requirement under SOX Section 204
(SOX, 2002) that the auditor must disclose his
‘‘preferred’’ accounting, not just the acceptability
of the accounting, to the audit committee. Fur-
thermore, the requirement that the audit commit-
tee engage the auditor (SOX, 2002, Section 301)
may reduce the ability of the CFO to threaten to
put the audit out to tender. However, a study of
auditor turnover suggests that in the post-SOX
period auditor turnover has increased, not
decreased, making it potentially easier for the
CFO to execute such a threat (Reilly, 2006;
Turner, Williams, & Weirich, 2005).
Limitations
Our CFOinterviewees came froma wide range of
industries, company sizes, and ?nancial sophistica-
tion and our audit partner interviewees ranged from
industry specialists with large local resources to
draw on to general audit partners at more remote
o?ces, however, they were not solicited to partici-
pate based on any random sampling plan, hence
they may not be representative of all Canadiancom-
panies and ?rms. However, not one CFO we con-
tacted declined to be interviewed. Also, there is
always concern that the individual interviewees
have selective recalls of the event. In this research
the similarity in the recalls of ?ve dyads discussing
the same issue suggests this is a minor concern.
Further, our interviews took place just prior to
passage of the Sarbanes Oxley Act (SOX, 2002).
The passage of the Act and the subsequent interna-
tional changes in the audit environment may moti-
vate audit partners to develop ‘moves’ that position
themselves as the expert advisor auditor in proac-
tive relationships that they claim is ‘‘ideal’’. How-
ever, the evidence is far from clear on that point.
Initial reports suggest there was a ‘‘chill’’ (e.g.,
Millman, 2005; PCAOB, 2005) in communications
between the auditor and client management in the
?rst years after SOX. Client management previ-
ously in a proactive relationship found that audit
partners would no longer give them advice about
their accounting (Millman, 2005). Indeed, in May
2005, the regulator itself urged auditors to not dis-
engage from management’s accounting questions
(PCAOB, 2005). Hence, the immediate impact of
SOX might well have been to increase the number
of reactive relationships where the auditor only
learns of the issue after the fact as part of a quar-
terly audit/review or year-end audit.
Finally, the increased attention on the audit
committee might well lead to more extensive
involvement of that committee than has been doc-
umented to date (e.g., Cohen, Krishnamoorthy, &
Wright, 2002; Gendron & Be´dard, 2006). How-
ever, in the case where we were asked to interview
the audit committee chair, we found no new
insights or, indeed, any discrepancies with what
the CFO and partner reported. Future research,
however, will need to consider whether any exam-
inations of accounting negotiation should include
the triad of the CFO, audit committee and the
audit partner, rather than our dyadic approach.
A ?nal word: contextualizing negotiation
Overall, our analysis of dyads aids us in identi-
fying factors in the ‘shadows’ of negotiation that
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 381
appear to a?ect the process and the substantive
outcome of negotiation. By incorporating this
more contextualized understanding of the dyadic
relationship, archival researchers, analytical
researchers and experimental researchers have
additional avenues to pursue in investigating fur-
ther the opaque world that is negotiation over
accounting policies, disclosures and measurement
that underlie the creation of the modern ?nancial
statements.
Some areas worth pursuing might include: (1)
investigating additional audit partner–CFO
dyads, but with a concentration on dyad types
that may have di?erent ‘shadow’ negotiation
dynamics, for example, those involving women,
senior or junior partners, or di?erent industries;
(2) determining how the audit ?rms deal with
audit partners who are not able to adapt to
CFO-de?ned roles; (3) examining whether the
‘shadow’ negotiation and underlying relationship
change when the client receives or has received a
modi?ed or quali?ed opinion, restatement, or
been subject to a regulatory investigation; (4)
exploring how certain audit partners, for example,
a rigid, conservative partner, relate to di?erent cli-
ents and whether CFOs position these partners in
similar or dissimilar roles; and (5) probing the new
three-way relationship due to the increased weight
being given to the audit committee in the prepara-
tion of the ?nancial statements to determine
whether these negotiations are being played out
di?erently.
In addition, given our perhaps troubling ?nding
that auditors appeared to be giving the CFOs the
upper hand in positioning during the ‘shadow’
negotiation by not applying ‘moves’ themselves,
future work might investigate whether there are
other ‘moves’ that the audit partner uses. Alterna-
tively, researchers could develop ‘moves’ and
experimentally test ones that would be appropriate
for audit partners in order to level the playing ?eld
in these situations.
Acknowledgements
Thanks to the Canadian Institute of Chartered
Accountants through the Canadian Academic
Accounting Association and to the Social Sciences
and Humanities Research Council for generous
?nancial assistance. Excellent research assistance
has been provided by Guoping Liu (then Ph.D.
student), Brad Pomeroy (then master’s student)
and Rawan El khatib and Pam McIntryre (then
co-op students). Comments from participants at
workshops and conferences including the Univer-
sity of Saskatchewan, University of Toronto,
HEC Montreal, University of Alberta, AAA An-
nual Meeting, CAAA Annual Conference,
Queen’s School of Business Field Research in a
North American Context Conference, Cornell
University and Boston College are very much
appreciated. Individual comments have been re-
ceived from Fred Phillips, David Saunders,
Vaughan Radcli?e, Yves Gendron, Chris Chap-
man, Thomas Ahrens and Clinton Free, as well
as two anonymous reviewers.
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S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 383
doc_279354875.pdf
We carry out an interview based field study of chief financial officer (CFO)–audit partner dyads to examine the
assumption that the roles played by each side and the nature of the relationships are similar across negotiations. These
dyads freely discussed with us their relationship, a specific issue negotiated and it’s resolution process. Employing the
lens of social positioning negotiation research, we find these negotiations are ‘fluid’, with continual redefinition not only
of the substantive issues under negotiation, but also of the negotiation roles and relationships
Auditor–client management relationships and roles
in negotiating ?nancial reporting
Susan McCracken
a
, Steven E. Salterio
b,
*
, Michael Gibbins
c
a
DeGroote School of Business, McMaster University, Canada
b
School of Business, Queen’s University, Kingston ON, Canada K7L 3N6
c
School of Business, University of Alberta, Canada
Abstract
We carry out an interview based ?eld study of chief ?nancial o?cer (CFO)–audit partner dyads to examine the
assumption that the roles played by each side and the nature of the relationships are similar across negotiations. These
dyads freely discussed with us their relationship, a speci?c issue negotiated and it’s resolution process. Employing the
lens of social positioning negotiation research, we ?nd these negotiations are ‘?uid’, with continual rede?nition not only
of the substantive issues under negotiation, but also of the negotiation roles and relationships (i.e. ‘shadow’ negotia-
tions). The CFO’s actions and expectations in these ‘shadow’ negotiations appear to de?ne the auditor’s role and
the relationship’s parameters, but both can evolve over time. The audit partners express a desire to be in the ‘‘ideal’’
relationship where they assume the role of the ‘expert advisor’ (as opposed to a ‘police o?cer’) but they seemingly have
no explicit strategy to move the relationship toward a ‘proactive’ (rather than ‘reactive’) state. Furthermore, the audit
partner is always the ‘relationship manager’ whose job it is to see that client management remains ‘‘happy’’. These roles
and relationships negotiated in the ‘shadows’ also a?ect how the negotiation process unfolds, including the set of alter-
native accounting treatments considered during negotiations. Finally, audit ?rms appear to manage the assignment of
partners to engagements based on CFO preferences and remove those partners who are in ‘‘poor’’ relationships, irre-
spective of why the relationship is considered by the CFO to be ‘‘poor’’. Implications for the broader research program
on auditor–client management negotiations are discussed.
Ó 2007 Elsevier Ltd. All rights reserved.
Introduction
Auditor–client management negotiation re-
search, while increasing, is still understudied, with
much of the research concentrating only on the
audit partner. Negotiation, however, is dependent
on more than one party. This study speci?cally
0361-3682/$ - see front matter Ó 2007 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2007.09.002
*
Corresponding author. Tel.: +1 613 533 6926; fax: +1 613
533 2325.
E-mail address: [email protected] (S.E. Salt-
erio).
Available online at www.sciencedirect.com
Accounting, Organizations and Society 33 (2008) 362–383
www.elsevier.com/locate/aos
focuses on actual audit partner–chief ?nancial o?-
cer (CFO) dyads (the two main negotiators), who
discuss their roles, relationships and the negotia-
tion of a speci?c issue(s). This shift in focus distin-
guishes our study, as prior research has rarely
focused on the audit partner–chief ?nancial o?cer
(CFO) dyad in an actual relationship (Beattie,
Fearnley, & Brandt, 2001; Beattie, Fearnley, &
Brandt, 2004).
The underlying assumption in the accounting
negotiation literature to date is that each party has
agency, in the sense of an ability to advocate for a
position within a well-determined role embedded
in a well-understood relationship (Kolb, 2004a).
However, as Lewicki, Barry, and Saunders (2006,
p. 276) point out, ‘‘only recently have researchers
begun to examine negotiations in a relationship
context . . .. where the parties have a substantial his-
tory and anticipate a long future relationship’’, a
characteristic of typical audit partner–CFO negoti-
ations.
1
We employ one such line of negotiation
research, social positioning, which examines how
parties to a negotiation focus not only on the sub-
stantive issue being negotiated, but also, partake
in a ‘shadow’ negotiation (a negotiation over inter-
pretation of negotiator’s roles and actions permissi-
ble in the relationship that takes place
simultaneously with the negotiation over substan-
tive issues) where they attempt to position them-
selves and each other with regard to their roles,
the legitimacy of their positions and their relative
negotiating power (Kolb, 2004a). Prior research
posits that this ongoing ‘shadow’ negotiation a?ects
how any substantive negotiation is carried out and
who claims the most ‘value’ in the current process’s
outcome (Kolb & Williams, 2000).
In this paper, we analyze interviews in which
dyads of CFOs and their audit partners describe
the negotiation of a speci?c accounting issue.
The interview process involved extensive research
of archival documents (including news accounts,
webcasts, regulatory disclosures) for each com-
pany, separate open-ended questioning of each
audit partner and CFO, and speci?c follow-up
questioning of the interviewees to ensure all
aspects of the negotiation process and relationship
had been covered. This research approach permits
us to actively listen to the thoughts of both parties
on their relationships and their roles in the context
of negotiating a substantive accounting issue,
albeit after the fact. Hence, this research is consis-
tent with Cooper and Robson’s (2006, p. 435) call
for ?eld studies to ‘‘examine how accounting and
audit decisions are made’’.
Analyses of the interviews involved two coders
extensively reviewing the interview transcripts to
identify key themes important to the negotiations.
Themes consistently identi?ed by both coders dem-
onstrate the unique characteristics of auditor–cli-
ent management negotiation. We also ?nd clear
evidence that issue ‘?uidity’ (Kolb & Williams,
2000), a fundamental predicate of social position-
ing research in negotiation, is replicated in our
dyads, supporting our use of social positioning
negotiation research as our theoretical lens.
2
Our analysis indicates that the CFOs de?ne the
relationship and the roles. Some CFOs position
the relationship as being ‘proactive’, where the
CFO initiates consultations with the audit partner
before transactions are undertaken or disclosures
drafted to ensure that the ?nancial statements
are of ‘‘high quality’’. Our audit partners
embraced this ‘expert advisor’ role and relationship
as their ‘‘ideal’’ and discussed how they would like
all client relationships to be proactive.
Other CFOs position the auditor into a ‘reac-
tive’ relationship. In these relationships, the CFO
views the ?nancial statements as being ‘‘his’’ and
does not typically consult the auditors regarding
appropriate GAAP treatment. This approach
results in the audit partner not identifying issues
until late in the audit, with the CFO strongly com-
1
We adopt the convention of using double quotation marks
and text indentations to indicate direct quotes either from our
interviews or the cited sources. Single quotation marks indicate
our use of a term to describe a concept that is used with
acknowledgement from other sources. We bold and put in
single quotation marks when we ?rst introduce terms we use to
describe concepts that we de?ne in this paper, after that they
appear in plain text.
2
‘Fluidity’ of what is being audited and how the audit is
carried out has been researched in the public sector (e.g., Power,
1997b; Radcli?e, 1999) but this is the ?rst instance we are aware
of in the for-pro?t sector.
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 363
mitted to his position and, thus, making the nego-
tiations more di?cult. While some audit partners
report they resist (e.g., Dirsmith, Heian, & Coval-
eski, 1997) being cast in this ‘police o?cer’ role and
reactive relationship, others are content to accept
it, with the belief that they can transform the rela-
tionship over time.
Interestingly, other than the passage of time
and getting to know the CFO better, audit part-
ners appear not to have developed strategies to
convert these reactive relationships into proactive
relationships. In addition, audit ?rm management,
aware of these two audit partner roles, matches
audit partners with CFOs so that partners who
are the least resistant to being in a reactive rela-
tionship are assigned to CFOs who desire that type
of relationship and partners who strongly prefer a
proactive relationship are assigned to those CFOs
who desire the same.
Turning to the process, in both types of rela-
tionships the dyads work together to resolve the
issues and even when the discussions become
heated, the auditor is often able to maintain a cor-
dial relationship with the client. Our analysis also
shows that, regardless of the relationship, the audit
partner is the ‘‘relationship manager’’, responsible
for keeping the client ‘‘happy’’ and the relationship
in a ‘‘good’’ state (Kolb & Williams, 2000).
Finally, and again consistent with the social
positioning negotiation research, we see that the
‘shadow’ negotiations have e?ects on the substan-
tive issue being negotiated. Our analysis suggests
that the audit partner’s development of a potential
solution set and the approaches used to resolving
the accounting issue are a?ected by the CFO-insti-
gated relationship norms. Hence, there are poten-
tial real e?ects to the ?nancial statements from
the CFO’s actions to position the auditor into a
certain relationship type and role in that relation-
ship. Overall, our research further ?eshes out audit
scholarship that examines the ‘‘back stage’’
(Power, 2003) of audit practice.
We proceed as follows: ‘‘Role and relationship in
negotiation research’’ brie?y reviews the negotia-
tion research on roles and relationships. ‘‘Research
sites’’ describes our research sites and ‘‘Research
method’’ describes our research method, the com-
bined archival and interview approach. ‘‘Analyses
of roles and relationships’’ presents our analysis
whereas ‘‘Conclusions: expanding our understand-
ing of accounting negotiation’’ discusses how our
?ndings expand our understanding of auditor–cli-
ent relationships and negotiations.
Role and relationship in negotiation research
Most prior research on negotiation has focused
on negotiations between unrelated parties with no
prior knowledge of one another (Lewicki et al.,
2006). One stream of negotiation research, how-
ever, has studied negotiation relationships in rich
and natural ?eld contexts in a variety of settings,
including health care (Kolb, 2004b) and public
schools (e.g. Putnam, 2003; Putnam, 2004), and
where relationships are developed and continuing,
analogous to the audit partner–CFO relationship
being studied in this paper. This research stream
views negotiation as taking place on two levels
simultaneously. In addition to negotiating the sub-
stantive issue, the participants are involved in a
‘shadow’ negotiation to de?ne the roles of the
negotiators and their relationships (Kolb & Wil-
liams, 2000). This type of negotiation research,
denoted as the social positioning perspective, views
negotiators as being engaged in constructing their
roles and relationships, subject to the expectations
and constraints of the social structure in which
they ?nd themselves (Kolb, 2004a). The focus is
on the relationships and how the roles are (de)con-
structed in the negotiation.
3
Kolb (2004b) explores ways that social posi-
tioning can occur in negotiation through ‘moves’
that involve the actions taken by each party to
structure their own role and to de?ne the role of
the other party. The outcomes of these ‘moves’
can either enhance one’s ability to advocate for
one’s interests or undermine the ability of the
other side to do the same (Kolb, 2004a), hence
a?ecting both how the relationship works and
the power of each negotiator. Tactics Kolb cites
that can be used to gain such an advantage include
challenging the experience/expertise of the other
3
Indeed, some writers have dubbed this as ‘‘role negotiation’’
(Gerson & Preiss, 1985 as cited in Kolb, 2004a).
364 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
side, demeaning the other sides’ ideas, criticizing
their approach to negotiation and making implicit
or explicit threats to end the relationship (Kolb,
2004a). Each of these tactics can be seen as exer-
cises in power by attempting to put the other party
in ‘‘his or her place’’.
When one negotiator makes a ‘move’ the other
party can resist the ‘move’ via a ‘turn’ (Kolb,
2004a). ‘Turns’ are the tactics employedby the party
who has been subject to a ‘move’ to resist the
attempted positioning. Kolb (2004a) suggests sev-
eral ways that a party can ‘turn’ a ‘move’, via inter-
rupting (or suspending) the negotiation, naming the
tactic being used by the other party, questioning the
other party as to why they did what they did, cor-
recting the other party’s assumption and suggesting
a replacement for it, and diverting the attention
back to the substantive issue. It is through these
‘moves’ and ‘turns’ that the ‘shadow’ negotiation
about relationships and roles takes place.
This strategic positioning negotiation research
provides a lens through which we examine the rela-
tionships among our audit partner–CFO dyads.
Hence, in carrying out our analysis of the themes
in our dyads, we are informed by social position-
ing research, whilst being alert for alternative
interpretations and patterns.
Research sites
This section describes the negotiation contexts
and the issues being negotiated, which form the
background for our subsequent analysis of the
‘shadow’ negotiation of roles and relationships.
We also discuss how we obtained access to this
sensitive data as previous researchers have found
access to be a non-trivial problem in this area
(e.g., Gendron, 2000).
The dyads – obtaining access
We approached nine companies’ CFOs (all but
two interviewees had the formal title of CFO and
the other two were the CFO but the CFO title
was not used in their ?rm), employing our col-
leagues’ contacts in corporate Canada, with a
request for an interview on the subject of audi-
tor–client management negotiation about account-
ing issues. All nine CFOs approached agreed to be
interviewed. Interviews were conducted in Novem-
ber and December 2001. Eight of the nine CFOs
provided us with a speci?c example of an account-
ing negotiation. The ninth CFO and the com-
pany’s controller described the process they went
through to ensure that their accounting was so
‘‘conservative’’ and GAAP-compliant that there
was no reason for negotiations to ever occur.
At the conclusion of each CFO interview, we
asked if the CFO would be willing to allow us to
speak to the audit partner. Eight of the nine CFOs
agreed to allow us to interview the audit partner
and to grant the partner permission to candidly
discuss the relationship with the CFO and client
company.
4
We agreed that we would not divulge
to the audit partner the speci?c example the
CFO had discussed with us, so the audit partner
would not know which negotiation(s) were on
the CFO’s mind, which could potentially have
caused future problems for the CFO. The only
CFO who would not give permission to interview
the audit partner had described an issue that took
place less than two weeks before our interview,
and felt it would not be prudent to focus the part-
ner on negotiation with the CFO so soon after this
issue’s resolution.
5
Hence, there was a potential of
seven matched issues going into our interviews
with the audit partners (nine less one no permis-
sion and one no example). Five of the seven audit
partners independently chose the same negotiation
issue that their respective CFO had, giving us ?ve
common issues in ?ve relationships in addition to
?ve other issues across three relationships for anal-
ysis. As we are studying roles and relationships, we
carried out our analysis across all eight dyads, pay-
ing attention to any discrepant information that
arose in dyads not describing the same issue.
4
Several of the audit partners required this permission in
writing (in addition to orally from the CFO) due to their
understanding of the client con?dentiality section of the Rules
of Professional Conduct (ethical standards for Canadian
professional accountants) (ICAO, 2004a).
5
The CFO told us to ‘‘come back in six months or a year’’
and permission would be granted. Due to later events in that
company, that was not possible.
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 365
The dyads in context
The companies were in industries that included
?nancial services, high technology, manufacturing,
food and beverage, and travel and hospitality.
They were located in a large urban international
?nancial centre as well as in a nearby regional cen-
tre. We denote the eight dyads as being Companies
A to H. The then Big 5 audit ?rm o?ces varied in
size from well in excess of ?fty audit partners (plus
the usual assortment of tax, management advisory
services and other partners) to as few as ?ve to 10
audit partners. Table 1 summarizes the company-
speci?c information for the CFO and the company
as well as the audit partner and audit ?rm (limited
in detail by our promise of anonymity to our inter-
viewees). Below we summarize the relationship
contexts and accounting issues discussed.
Company A
Company A strives to ?ve-star quality in all
aspects of its business, including its ?nancial report-
ing. The CFO is somewhat o?ended by GAAP and
often believes that the substance of the business is
not accurately conveyed when GAAP are applied.
The audit partner is highly respected and valued
by the CFO, other executives and his ?rm.
The issue, not entirely resolved at the time of
the interviews, was due to an economic downturn
that resulted in the stock price moving below the
conversion price for a material convertible debt-
equity instrument. The issue was whether the
instrument was debt or equity. The CFO identi?ed
the issue, and although he and his accounting team
researched it, he called in the auditors to take the
lead on resolving it. Given the issue’s seriousness,
high-level members of Company A were involved
in the resolution process. A temporary truce based
on the audit partner’s position was taken, with the
expectation that the issue would resolve itself by
year-end.
Company B
Company B has an objective of expansion. The
CFO describes himself as being aggressive when
applying GAAP, and believes that he has the ?nal
say over what is reported in the ?nancial state-
ments, often causing issues with the auditor. The
audit partner has been involved with Company B
since its start-up. His approach is to work with
the client to resolve issues in a manner suitable
to the client.
The issue, identi?ed by the auditors late in the
audit, related to a recent change in tax legislation.
The CFO applied new legislation when calculating
the company’s tax provision, as it would allow for
better ?nancial results. The audit partner pointed
out that the new legislation was just proposed and
had not been enacted, and thus, could not be
applied. The CFOhad released guidance to analysts
based on his interpretation of the new legislation,
causing him to be even more entrenched in his posi-
tion. The audit partner worked with Company B’s
audit team to ?nd compensating items to o?set the
improper treatment of the tax provision. Thus, the
CFO’s position was accepted, with the audit partner
requiring other previously unbooked adjustments.
Company C
The ?nancial reporting for Company C is lar-
gely controlled by the US head o?ce. Likewise,
the audit partner’s explicit role is set by the US
o?ce in charge of the parent company’s audit.
The issue was due to the tight reporting dead-
lines required by the auditors of the parent com-
pany. Both sides had managed for a number of
years to deal with an ongoing sales cut-o? issue
by ensuring that the sales in the ‘‘stub’’ periods
did not materially di?er.
6
In the current year, the
di?erence in the sales for the two stub periods
approached materiality, potentially warranting
an adjustment. In the end, both sides determined
that the adjustment was not material.
Company D
Company D is a conservative company that
prides itself on providing a high quality product.
The CFO is not a GAAP supporter but
6
Due to the tight reporting deadline, Company C closed its
books on December 24th each year, and then would use the 52
weeks ending on that date for the ?scal reporting. The auditors
of Company C would compare the two ‘‘stub’’ periods,
December 24th to December 31st for the year under audit
and the previous year, to ensure that the transactions that
occurred did not materially di?er.
366 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
Table 1
Description of CFO and the company; the audit ?rm and audit partner (as at nearest year-end prior to interview date for each company)
CFO–Audit partner dyads describing the same issue CFO–audit partner dyads describing a
di?erent issue
Company A Company B Company C Company D Company E Company F Company G Company H
Panel A: The CFO
1. Interviewee’s professional accounting
quali?cation(s)
CA
*
CA CA CA CA CA CA N/A
CA
**
2. Interviewee’s years of business
experience
>20 years 10–15 years >20 years >20 years 15–20 years 10–15 years >20 years >20 years
>15 years
*
3. Frequency of interviewee’s reported
experience negotiating accounting issues
Rarely Most years Rarely Most years Most years Most years Most years Never
Never
***
Panel B: The CFO’s organization
1. CFO’s organization description
(a) Type of organization Public
company
Public
company
Subsidiary of large
public multi-
national company
Public
company
Public
company
Public
company
Public
company
Public
company
(b) Annual revenue ($CDN) 100–499
million
100–499
million
N/A 1 billion–10
billion
100–499
million
25–50
million
1 billion–10
billion
1 billion–10
billion
(c) Total assets ($CDN) 500–999
million
100–499
million
N/A 1 billion–10
billion
100–499
million
25–50
million
100–499
million
1 billion–10
billion
Panel C: The audit ?rm and audit partner
1. Type of audit ?rm Big 5 Big 5 Big 5 Big 5 Big 5 and
local ?rm
*
Big 5 Big 5 Big 5
2. Recency of negotiation example 0-3 months 6 months to
1 year
More than 2 years 3–6 months 6 months to
1 year
1 years 6months to
1 year
1–2 years
3. Length of interviewee’s relationship
with CFO
More than 3
years
More than 3
years
More than 3 years More than 3
Years
One year One year One year More than 3
years
4. Interviewee’s years of audit
experience
>20 years >5 years >10 years >20 years >10 years >10 years >10 years >10 years
5. Interviewee’s reported experience
with accounting negotiations
Every year Every year Every year Every year Every year Every year Every year Every year
Notes to Panel A:
*
CA – Chartered Accountant.
**
CFO who was not a professional accountant had his controller participate fully in a joint interview between the researchers and the CFO and controller.
***
Despite both CFO and controller reporting ‘‘never’’ the audit partner easily recited several recent issues where he felt he was negotiating with client management.
Note to Panel C:
*
Company E has two audit ?rms for historical reasons associated with the founding of Company E. The local ?rm works on a well de?ned low risk area of the audit as
described by the Big 5 ?rm audit partner as well as the CFO. We only interviewed the Big 5 partner, not the local ?rm partner.
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2
0
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8
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7
understands that meeting GAAP is required for
unquali?ed ?nancial statements. The audit partner
is typically involved in the goings-on of Company
D throughout the year due to the complexity of
the business, and the CFO’s appreciation of the
need to comply with GAAP.
The issue related to a changed accounting stan-
dard with respect to the amortization of goodwill.
The audit partner recommended that goodwill no
longer be amortized. The CFO wanted to continue
to amortize the goodwill. Both sides worked
together, with the CFO requesting the auditors
to research the treatment by similar companies.
The result was to report as the CFO preferred,
however, the audit partner required additional dis-
closure in the notes.
Company E
Company E is struggling to improve operations
and results. The CFO follows the aggressive
reporting mandate set by the CEO and other
senior executives. The audit ?rm is a long-time
auditor of the company, however, the previous
audit partner was replaced with our interviewee
because he could not get along with the new CFO.
The issue arose from the company not doing as
well as it would like and dealt with whether to rec-
ognize a large customer prepayment (i.e. cash
deposit) as a liability or revenue. The senior man-
agement team was pressing to recognize the pre-
payment as revenue. The auditors were not
contacted until after the contract was written, the
transaction was entered into, and draft year end
?nancial statements were prepared on the basis
the prepayment was revenue. The audit partner
did not agree with this treatment. The CFO
believed that the audit partner’s interpretation of
treating it as a liability was illogical and mislead-
ing. In the end, the auditor’s position was accepted
and the audit partner was required to aid the CFO
in persuading the CEO and audit committee that
this was the appropriate GAAP treatment. This
resulted in Company E not meeting market expec-
tations and su?ering a decline in stock price.
Company F
Company F and its CFO are relatively aggres-
sive ?nancial reporters. The CFO believes the
audit ?rm, and particularly, the previous audit
partner, treated his company too conservatively.
Indeed, the CFO put the audit out to tender, due
to his disgruntlement. In the end, the original audit
?rm was retained; however, a change in partner
was a condition of renewing the engagement.
The newly-assigned audit partner, our interviewee,
has been commissioned by his ?rm to work hard to
retain the client.
The issue discussed by the CFO was the result of
an economic downturn. Company F required cash
and convinced a customer to make an advance
deposit for sales. After consultation with the audi-
tors, Company Frecorded the prepayment as a loan
with an interest component. The CFO gave earn-
ings guidance to ?nancial analysts based on this
accounting treatment. Subsequently, the customer
purchased Company F’s product more quickly than
expected and used up the advance deposit within a
month or so causing the auditors to change their
position and suggest that some of the deposit be rec-
ognized as a discount, not interest. After what both
described as contentious negotiations, the CFO’s
position was accepted by the audit ?rm.
The issue discussed by the audit partner for
Company F was about di?erences in how to recog-
nize revenue, which he believed resulted in the
audit being put out to tender. Although he pre-
ferred a more conservative treatment, he searched
for a compromise and ended up accepting the
CFO’s position, provided there was additional dis-
closure in the notes.
Company G
Company G has recently been acquired by a
larger company in the same industry. The CFO, a
former audit partner, believes that, since he has been
on both sides, he knows how to produce the ?nan-
cial statements and therefore requires little help
from the auditors. He was not happy when the
acquirer made him switch audit ?rms. Indeed, the
?rst audit partner appointed by the new audit ?rm
lasted only one year on the engagement before being
replaced. The new, more-experienced audit partner
reported in our interview that he had been charged
with improving the relationship with the CFO.
The issue discussed by the CFO had, according
to the CFO, caused the ?rst audit partner to be
368 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
replaced because of a personality clash between the
two. The CFO and audit partner had opposing
views on how to account for restructuring costs
related in part to the acquisition. The CFO wanted
to capitalize some of the costs because he believed
they added future value; however, the audit partner
insisted that all of the costs be expensed. The CFO
was not at all open to the audit partner’s opinion or
arguments, causing the issue to be escalated to the
national o?ce of the acquiring company’s audit
?rm. In the end, the CFO’s position was accepted.
The issue discussed by the audit partner dealt
with di?erences in footnote disclosures. He recom-
mended more concise and clear disclosure of sev-
eral material items. The CFO, who the auditor
reported viewed the ?nancial statements as ‘‘his’’,
would not agree that the proposed note disclosure
was more transparent and demanded that his note
disclosure be accepted.
Company H
Company H had been spun o? from a huge
multi-national company some years ago. The
CFO proudly stated that his company had never
had an issue requiring negotiation with the audi-
tors. He believes his company is extremely conser-
vative in its ?nancial reporting. The audit partner
became the engagement partner after the previous
partner was rotated o? the audit in accordance
with the audit ?rm’s partner rotation policy. She
was able to identify several issues that she had
negotiated with this client.
The issue discussed by the audit partner was
due to her and the CFO having di?erent interpre-
tations of how to account for goodwill under
then-new accounting standards. The company’s
?nancial management and audit partner worked
together to come up with a solution that would
be mutually satisfactory. In the end, the company
management got its preferred treatment for the
accounting numbers; however, the audit partner
obtained additional disclosure.
Research method
Prior to each of our interviews, we read the
three previous years’ annual reports and proxy
statements, examined analysts’ reports for each
company, listened to archived conference calls
between the company and analysts, and examined
newspaper stories for the preceding twelve months.
Hence, going into each interview we had a rich set
of declarative knowledge with which to contextu-
alize our interviewee’s ‘story’ (Kolb & Williams,
2000).
The CFOs and audit partners were interviewed
separately, without the CFO knowing that we were
going to ask him or her to let us interview the audit
partner. In addition, for one dyad we had the
opportunity to discuss the negotiation process
with the audit committee chair (e.g., see Gendron
& Be´dard, 2006 on audit committee involvement
with di?cult accounting issues). That interview
did not provide any observations that were new
(vis a` vis the CFO–audit partner interviews), and
provided corroboration for much of what the
CFO and audit partner told us.
Our interviews involved ?rst asking unstruc-
tured open-ended questions that allowed the inter-
viewees to freely describe their negotiation roles,
relationships and settings. Table 2 contains the
interview protocol. The questions in Panel A are
open ended and allowed the interviewees to high-
light the factors that were important to them with-
out our leading them to what we might think were
the important aspects of their experience.
The questions in Table 2, Panel B were drawn
from the previously published research on the
auditor–client management negotiation process
(e.g. Gibbins, Salterio, & Webb, 2001). If a ques-
tion in Panel B was answered by the interviewee
in the course of responding to Panel A’s questions,
we did not ask the Panel B question, unless it was
to clarify something that arose in the previous por-
tion of the interview. The 16 interviews, with one
20-min exception, took from 45 to 75 min. All
interviews, but the one shorter CFO interview,
were carried out in a relaxed conversational tone
with no pressures from the interviewee for us to
?nish quickly. All interviews were taped with the
permission of the interviewee and transcribed by
an independent transcription professional. One of
the authors read the draft transcripts while listen-
ing to the tapes and reconciled any discrepancies
with the transcriptions. Finally, all transcripts
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 369
were returned to the interviewee for approval of
factual accuracy and only minor changes resulted.
The data analysis undertaken adapts methods
proposed by Eisenhardt (1989) and Anderson
(1995). The interviews were reviewed to identify
key themes brought out by the interviewees as
being important to their negotiations. First, one
of the researchers and a research assistant each
read the transcripts in three di?erent random
orders: only CFOs, only audit partners, and the
CFO–audit partner dyad. Once the coders had
completed the coding for the three interview sets;
the two coders met and discussed their individual
thematic ?ndings. Approximately 80% of the
themes or patterns had been identi?ed by both
coders. The coders then went back and reviewed
the interviews and their codings one more time in
light of their discussion. At a ?nal meeting, the
coders reached consensus through discussion
about the themes and patterns identi?ed.
Next, we returned to each company’s archival
data (annual reports, analysts’ reports, news arti-
cles, including material disclosed since our inter-
views) and re-read them in light of this analysis
to see if there were suggestions that our analysis
was inconsistent with the archival records. While
we found hints of the issues negotiated and the dis-
closures made both in regulatory ?lings and in
webcasts with ?nancial analysts, we found no
reports that suggested our analysis was con-
tradicted by the archival records.
The triangulation made possible by multiple
data-collection methods across multiple dyads
provides for strong substantiation of constructs
Table 2
Interview protocol for CFOs and audit partners
Panel A – Open-ended questions
1. How does the process of ?nalizing the ?nancial statements with [auditor or CFO] usually work?
We are interested in situations where a measurement, valuation or disclosure issue complicated the process of ?nalizing the
?nancial statements because you and [auditor or CFO] had di?erent views about handling (or not handling) an issue or issues
in the ?nancial statements
(prompts to elaborate)
2. To make the interview concrete, please think of such an issue you have experienced. Now, please describe the issue and what the
di?erent views on it were.
(prompts to elaborate)
3. Now please take several minutes to tell us how the issue arose and how,
if at all, it was ?nally resolved.
(prompts to elaborate)
Panel B – Questions based on Gibbins et al. (2001) model
Would you please elaborate on your comments by answering a few questions about the issue? These are questions we would like
to use to triangulate the situation you were in, so, again, we seek only your own experience of each.
4. Details about the issue:
(a) How and when did this issue arise? Was there more than one issue dealt with during the same negotiation?
(b) Why was this an issue?
(c) What was your view on this issue? Why? What was in?uencing your view?
(d) What was [auditor or CFO] view on this issue? Why do you think he/she had this view? What was in?uencing his/her view?
(e) Whose interests were a?ected by the proposed adjustment to the ?nancial statements?
(f) Was there a range of acceptable outcomes or were there just two options?
(g) Was there a search for a compromise?
(h) Was there a search for a new outcome?
(i) Were you satis?ed that the ?nalized ?nancial statements re?ected the economic reality facing the company?
5. What approaches did you employ to convince [auditor or CFO] that your position was acceptable?
6. What arguments or pressures did [auditor or CFO] employ to convince you to adopt his/her position?
7. What other parties (internally to the ?rm, e.g. other executives/Board/AC and externally, e.g. creditors/regulators/shareholders)
were involved? How did they impact the resolution of the issue?
8. Describe your relationship with the [auditor or CFO] and his/her audit ?rm/company? Are there any other members of the audit
?rm/company, beside the [auditor or CFO], who are important to your relationship with the audit ?rm/company?
Anything else you would like to tell us?
370 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
and theoretical development (Yin, 1994). In sum, a
number of steps were taken to ensure the trustwor-
thiness of this qualitative ?eld study. Table 3 pre-
sents an overview of e?orts directed at enhancing
the trustworthiness of our data analysis. One
might argue these short interviews can provide
only limited insight, especially in light of the rich
tradition of qualitative research that generally
requires multiple points of access over an extended
period of time (e.g., Radcli?e, 1999 but see Gen-
dron, 2002 for more limited access).
7
However,
given the paucity of research in how audit and
accounting decisions are made (Cooper & Robson,
2006), the rich background archival research we
collected prior to each interview and the analytical
process we carried out, we believe this interview
set allowed us to examine the roles, relationships,
and their e?ects on accounting negotiation.
Indeed, the only other study in this area (Beattie
et al., 2004) was con?ned to examining structural
determinants of relationships (e.g. age gap
between CFO and partner) without examining
how the relationship was negotiated and with no
contextualization of the roles within the
relationship.
Analyses of roles and relationships
A key claim in the social positioning negotia-
tion perspective is that the negotiation does not
‘‘exist out there’’ waiting to be discovered, but
rather is part of a socially constructed process that
can be quite ‘?uid’ (Kolb, 2004a). All our intervie-
wees described the negotiation process as evolving
over time. The ‘facts’, issue context, parties’ posi-
tions, justi?cations and supporting accounting
research cited changed as the information set was
enlarged, shared and (re)interpreted during the
course of the discussions. Company D’s audit
partner described the process as
We discuss it and we start o? by saying we’ve
got this issue. Our ?rst reading says that
we’re probably going to have to have to do
it like this but I want to hear what you want
to do. ‘‘I don’t want to do that, I want to do
this.’’ Kind of look at the distance between
the two and say OK, lets start ?guring out
Table 3
Criteria and procedures for enhancing trustworthiness of data analysis
Criterion for trustworthiness Procedures undertaken
Credibility In-depth interviews separately with CFO then the audit partner with no evidence that they
corroborated in their responses
Triangulation of observations:
• Use of public archival material – news accounts, annual, quarterly reports etc.
• Across dyads
• Across same issues and di?erent issues
• Listening to CFO webcasts with ?nancial analysts in same time periods as interviews
took place
• Segregation of data gathering and data interpretation functions
Respondents reviewed interviews for accuracy
Transferability Sampling:
• Eight dyads
• Five common issues in relationships plus three additional relationships with di?erent issues
Thick description of issues
Dependability and con?rmability Triangulation of observations
Verbatim transcripts of recorded interviews as primary data. Primary data supplemented
by ?eld notes and archival data
Audit trail from data to ?ndings and copious use of primary sources
Note: This table is adapted from Basu et al. (1999).
7
In negotiation research Power (2003) featured 38, one hour
interviews and 2800 pages of ?eld notes from meetings observed
in addition to considerable assess to archival records.
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 371
what it all means and eventually we’ll start
documenting. But documenting, it’s more
reading and discussing and you know, here
read this note. Here’s an analysis, like a
working paper that kind of looks at the num-
bers and pros and cons and that sort of thing
but it’s not a formal documentation. . .. Posi-
tions change, thinking changes and what you
really want to do is get to the end and docu-
ment the process you went through and your
end conclusion in a formal fashion that you
can later come back to and say yes, that’s
what we did. And so in the end he would
get a memo on this.
Company F’s audit partner summed up how the
negotiators’ perspectives change over time and
how the resolution depends on this:
And so they consulted us early on saying
they were concerned, they don’t, they haven’t
gotten to the bottom of the issue but as they
look at the numbers they’re starting to ques-
tion as to whether they’ve been assembled in
the appropriate way. So we, the ?rst part of
that was to help them with a strategy to get
to the answer which was you know, now go
back and look at how this has been devel-
oped and see if you can re?ne your thoughts
on the issue. And at the same time, we’ll do
some research as to what is the appropriate
step to take, if in fact that is the case. So
they, we had kind of a parallel process. They
worked on the details of the numbers and we
worked on the statutory process and the dis-
closure processes that would surround the
correction. And ultimately they concluded
with us that the problem was not signi?cant
that really what had happened was there
had been a change in the business which as
a result if you were to stand at a position
today and look back, it doesn’t look the
same as what you’d see going forward but
that is because of business change, not
because there was an error in the way they
rolled up the numbers.
The discussions frequently went back and forth
between (re)conceptualizations of the issue, the
(re)analysis of the issue, and the information
exchanges that took place. For example, in Com-
pany E, contract language that had been described
as unambiguous in intention when the CFO
explained his reason for accounting was found to
be unclear with a more detailed reading of the con-
tract and the involvement of lawyers. This recon-
ceptualization of the issue lead to an enlargement
of the set of authoritative literature examined as
well as more conceptual discussions about whether
the payment was deferred revenue or a loan.
The discussion related to the negotiation con-
text, such as motivation, preferences and power,
also had no set location, being discussed at the
outset, in the middle or near the end, and often
in more than one place in the interview. This
non-sequential process is consistent with the social
positioning concept of negotiation ‘?uidity.’ It
appeared fundamental to the eventual resolution
of the issue: all the interviewees believed discussion
and ongoing dialogue were important to the reso-
lution. This ?uid process of issue identi?cation,
mapping of issue ‘facts’ to accounting standards
and other regulations, and rede?ning the issue
due to a deeper understanding of ‘facts’ and conse-
quences is not found in the questionnaire or exper-
imental literature on accounting negotiation (e.g.,
Gibbins et al., 2001; Trotman, Wright, & Wright,
2005).
Positioning in roles and relationships
We start our analysis with how we came to see
the relationships through our thematic analysis of
our interview data. We then relate it to the lens
provided by social positioning research on
negotiation.
The ?rst relationship type we discuss is what we
call a ‘proactive’ relationship, where the CFO con-
sults the audit partner throughout the year with
the goal of dealing with potentially contentious
issues at an early date and producing a no-sur-
prises audit. As one audit partner in a proactive
relationship (A) stated, ‘‘So it’s a good working
relationship that way. We’re set for speed dial,
we talk to them I would say once a week about
something. So it is very open and the issues were
on the table.’’ The ?nancial statements tend to be
372 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
viewed as a joint product or ‘‘our’’ statements; in
other words the audit partner ‘‘co-creates’’ them.
The CFO values the audit partner’s opinion and
asks for advice on accounting and disclosure treat-
ment in the early stages of developing the com-
pany’s position, often prior to consummating the
transaction or making the estimate. In these rela-
tionships, the CFOs stated they want the ?nancial
statements to be ‘‘right’’ and to be able to stand up
to detailed scrutiny. Company A’s CFO described
the audit partner, his role and their relationship as
He is di?cult, he’s ornery, but we love him
because he is brilliant. He is very risk averse
and that’s what we want in an auditor. We
don’t want the guy that says OK that’s
?ne. . .. And again, I think because we actu-
ally encourage the auditors on that
basis, we encourage the audit partner on that
basis – don’t let us make a mistake, knowing
or unknowing. Don’t let us make a bad judg-
ment, knowing or unknowing. And so
because of that there is that level of
understanding.
The audit partner described his role as ensuring
that the ?nancial statements are beyond reproach
in their adherence to GAAP, especially in the eyes
of ?nancial analysts. In these relationships, even
when negotiations do not go smoothly, the rela-
tionship is described as not being harmed and
the two sides work together to attain the ‘‘best’’
?nancial reporting. In these relationships, neither
side reported instances of open con?ict, discord
or threats. Nonetheless, as their examples illus-
trated, a ‘‘heated’’ negotiation can occur, given
that two accountants can have di?erent views on
the same transaction (Gibbins & Mason, 1988).
One ‘‘heated’’ negotiation was described by the
CFO of Company A:
I think it’s a tribute to the company that you
can have management thoroughly frustrated
with the issue, the audit committee to a per-
son thoroughly frustrated with the issue, and
the board, and yet the position that the CEO
took and I took was well let’s go with the
auditors for the quarter. We’ll communicate
it as best we can. The likelihood is we will
take more heat than we deserve to take in
terms of how the market reacts to it. But
that’s the right thing to do in the circum-
stance. . .. I think you are always trying to
do this so that the ?nancial community has
the best view of the real results of the
company. . .
Companies A, C, D and H’s relationships exem-
plify this proactive relationship type.
The other relationship type we denote as being
‘reactive’. The themes that characterize this rela-
tionship type include: the company has a position
on accounting for the issue that is known by many
senior managers and potentially by board mem-
bers, the audit partner is not informed about the
issue until after any transaction has taken place,
and the accounting issues are almost always being
dealt with after year-end or, if a formal quarterly
review is done, at the time of the quarterly review.
In the reactive companies, management had given
earnings guidance to the market analysts and
senior executives, without consulting the auditor
on this major issue, so what may have originally
been a less important issue that could have been
easily resolved became the focus of a serious nego-
tiation, due to the CFO’s commitment to his initial
position. The CFO of Company B con?rmed com-
mitments as potential problems:
I mean, I said this is my position and it was
pretty clear that you know, unless they made
me do it, and it was absolutely required
under GAAP, i.e., it’s material, or GAAS
even more so, then I wasn’t going to change.
I said my number has already been published
for the quarter. We do a quarterly release at
the end of February and then two months
later we have our audited, or a month later
we have our audited statements. If they’re
not the same then there’s a real issue. It
becomes a matter of credibility and all that
stu?. Unless it’s absolutely, fundamentally,
qualifying material, then I won’t change.
The audit partner of Company E provided a
similar analysis:
And so when they are falling short of the
guidance, they tend to look for things that
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 373
may have [been] overlooked in the normal
accounting process. And that was the real
motivation here – is to look at it and say,
okay something has fallen outside of the nor-
mal process. . .. I think the motivation, the
overall motivation is to try to preserve the
credibility of the guidance.
8
These CFOs rarely involved the audit partner in
deciding how to account for a major transaction.
When we asked about involving the audit partner,
Company G’s CFO explained, ‘‘Well I don’t think
we do in the normal course. We simply go on, and
again, unless we feel somewhat unsure of what we
are doing, we wouldn’t. We would just go on and
do it.’’ In a reactive relationship, the audit partners
reported that they have a smaller role in shaping
the client’s ?nancial reporting than do auditors
in proactive relationships. The auditors in reactive
relationships described themselves as making sure
that the ?nancial statements were GAAP-compli-
ant in all material respects, but with these CFOs,
they do not suggest or advocate a conceptually
sounder approach or one that is consistent with
most companies in the industry (the so-called ‘best
practice’). For example, when the audit partner for
company G was asked about his approach to
resolving the issue and whether he would push
for more clear and concise disclosure and recom-
mend how other companies had handled the dis-
closure, his response was: ‘‘We didn’t get into, I
would have if necessary, but no we didn’t get into
that degree of involvement. It was more just, you
know, here’s what looks like a practical solution’’
and ‘‘we shall listen to the personal preferences [of
the CFO]’’ and ‘‘if we can’t challenge them, then
they [the CFO] should hold the day. . . We don’t
look at things as right or, right or wrong.’’ In this
instance, after considerable work, the audit part-
ner found support for the CFO’s preferred posi-
tion and accepted that position. There was an
emphasis in all of these dyads (B, E, F and G)
on the audit partner ?nding justi?cation for the cli-
ent management’s accounting policy selection (see
Salterio, 1994; Salterio, 1996 for discussion of the
audit ?rm’s national o?ce supporting this
approach).
9
‘Moves’ and ‘turns’ in positioning
Having described the then-existing relationships
in our eight dyads, we now examine how the roles
were de?ned in these relationships. We make this
separation for analytical purposes only, recogniz-
ing that role and relationship are intimately inter-
twined with each other. In this analysis, we ?nd
evidence of several types of ‘moves’ made by the
CFOs, countered by several ‘turns’ by audit part-
ners, but can ?nd only one clear ‘move’ made by
the audit partners.
Overall roles
In all our dyads, it was clear that the audit part-
ner was the ‘relationship manager’, no matter what
the relationship. Indeed, audit partners consis-
tently described their role as one of developing
or maintaining a ‘‘good’’ relationship. They
emphasized that ‘‘keeping the CFO happy’’ is
important to the audit partner’s job. If the CFO’s
accounting is not accepted by the auditor, the
audit partner and the CFO expect that the audit
partner will repair the ‘‘damage’’ to the relation-
ship. The audit partner of Company G, who was
brought in to repair a damaged reactive relation-
ship, summarized his role as
Well, as one of my responsibilities as the
audit partner is also to be the relationship
partner for the ?rm and what that really
means is to get to know the senior manage-
ment of the company, understand their
issues, understand their needs and to make
certain that [my ?rm] as an organization is
properly serving the company.
8
Italics are added to quotes only if clari?cation is needed.
9
The various codes of professional conduct for chartered
accountants in Canada have recently been amended to prohibit
any chartered accountant from being associated with a GAAP
position that is described as ‘‘false or misleading’’ or any
‘‘extreme interpretation of GAAP’’ and apply to all CAs, not
just those in public accounting (ICAO, 2004b).
374 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
Threatening to end the relationship
The CFOs’ beliefs about how the relationship
should work, and their actions implementing those
beliefs, contribute to positioning the audit partner
as responsible for creating and maintaining a
‘‘good’’ client relationship. In addition, audit part-
ners reported that audit ?rm management actively
attempts to match an audit partner to the CFO,
based on the readiness of the audit partner to
accept the CFO-preferred role. If the CFO desires
a reactive relationship with the audit partner, but
the audit partner (in an ‘expert advisor’ role) consis-
tently promotes best practice accounting, objects to
the CFO’s desire for accounting that is in minimal
compliance with GAAP, and pushes early adop-
tion of preferred GAAP that will be mandatory
in future periods, the audit partner likely will be
replaced by the audit ?rm. Furthermore, if the
audit ?rm does not change the partner, the CFO
can ‘move’ to put the audit out for tender, as evi-
denced by actions reported in the Company F
dyad. From the view of the audit partner, both
the audit ?rm and the CFO actions can be consid-
ered as a ‘move’ consistent with the ‘‘threaten to
end the relationship’’ ‘move’, documented in social
positioning negotiation research (Kolb, 2004b).
In three of our interview companies (E, F and
G), where the CFO desired a reactive relationship,
the audit partner had been recently replaced by the
audit ?rm with the partner we interviewed. Audit
partner D described a relationship before removal
as, ‘‘And then you end up in ?ghts. And in the end
you become a policeman instead of an auditor.
And you just say no and it’s too damn bad if they
don’t like it. And you get ?red sometimes’’. The
CFO of Company G, who instigated an audit part-
ner change, described it as
And it got to such loggerheads that we in fact
did have a change in the engagement partner
the following year. Because I come back and
say that in a good relationship, with good
open communication, and good open dia-
logue, you should never get to that point.
You should always be able to resolve these
issues. Where you get a position like that,
then you’ve got a problem with chemistry
and dialogue and communication.
The audit partner for Company G described the
process of partner replacement:
When the previous partner was on the
account, I was the concurring partner on
the engagement. And I was the concurring
partner on the engagement because I had a
lot of [X industry] experience so I understood
the industry. I understood the business.
When [Company G] were looking to change
[the existing partner] on the engagement,
really it came down to who would probably
be the right ?t, sort of personality wise, num-
ber one. Number two, who has the proper
industry experience to be able to deal with
this company. And it came, it really came
down to, and I’m not sure internally there
was a lot of discussions because I think when
we talked about it. So it just made logical
sense that I would take it over. And I think
that was sort of the process. We had to move
quickly because I think they were serious
about us reacting real quick. So it just sort
of, everything sort of fell into place but it
wasn’t trying to ?t a square peg into a round
hole. It was more like well here’s the guy that
would make the second most sense to take
over this account.
In these three dyads (E, F and G), the CFOs’
expectations and actions, combined with the
response of audit ?rm management, resulted in
the removal of the existing audit partner, who
was actively resisting being party to a reactive rela-
tionship, from the engagement. The importance of
CFO expectations about the relationship was also
evident in the case of Company A. In this case, the
opposite exchange of partners took place, as the
CFO’s expectations led to an accommodating
audit partner being removed from the audit by
the audit ?rm. The Big 5 audit ?rm had a policy
that mandated audit partner rotation, hence the
previous expert advisor audit partner who had a
proactive relationship with the CFO was replaced.
The CFO stated that he was concerned that the
new engagement partner was too accommodating
of the company’s wishes, leaving the company
potentially exposed to negative publicity, due to
the possibility that the company would inadver-
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 375
tently adopt aggressive, but GAAP compliant (i.e.
acceptable without question by a ‘police o?cer’
auditor), accounting. Company A’s CFO insisted
that the audit ?rm’s management assign a partner
comfortable with a more proactive relationship to
their audit, in order to ensure Company A’s
accounting was beyond reproach. The audit ?rm
assigned such a partner, one described by the
CFO as ‘‘ornery’’, and both sides described the
relationship as being much improved.
Overall, irrespective of the relationship, the
CFOs’ expectations for the audit partners’ role in
their relationships is reinforced by the audit ?rm’s
management, via its partner assignment process.
Further, from a theoretical perspective, we can
see that one way that the CFO can position the
auditor in the relationship is via the ‘move’ of
employing threats of relationship change (either
to the audit partner or the audit ?rm).
In addition to the three examples where expert
advisor partners who sought proactive relation-
ships with the CFO were replaced, some partners
in proactive relationships told us they preferred
proactive relationships and were willing to lose a
client rather than be positioned as an auditor in
a reactive relationship. The audit partner for com-
pany D described why he prefers his proactive
relationship by comparing this ideal proactive cli-
ent to typical reactive clients:
The ideal, this is the ideal, this is the ideal. I
wish all clients operated on this basis. They
don’t. Often we come in, we get to year-end
and go oh my God, you know, what have
you been doing? Why didn’t you call us? This
and this and this is a problem. And you
know, then that makes us really mad because
it’s last minute and it’s ?ve problems at once.
And you know that the debits were going in
one direction and the credits in the other.
And it’s always bad news. It’s never good.
So, no, this is the ideal.
The audit partner of company H also explained
why she preferred proactive clients, ‘‘I would say
it’s an open and consultative relationship. I think
that [the clients in these relationships] trust the
advice that we give them and they turn to us as
an advisor to help guide them through.’’ She con-
cluded by indicating that the expert advisor role is
a preferred, less risky role for the audit partner.
Hence, it appears that on some level our audit
partner interviewees perceived the CFO actions
and expectations as to how the auditor should
act as being ‘moves’ that placed them in a speci?c
role and relationship.
Challenges to accounting expertise
Another ‘move’ revolved around the CFO posi-
tioning the audit partner as the lead in information
search and issue resolution. Despite this role
assignment, in some dyads the CFOs (A, D, E,
F-CFO, F-A/P and G-CFO) explicitly requested
additional consultation with the ?rm’s national
o?ce technical accounting unit (see Salterio &
Denham, 1997 for description of these units). Four
of the CFOs (A, D, G-CFO and H-A/P) wanted
to, and did, speak directly with the national o?ce
technical people, typically involving the engage-
ment partner. Company D’s auditor described
the role of the national o?ce as ‘‘to help us arbi-
trate’’ the issue resolutions. Results of these con-
sultations, especially when they resulted in
accounting di?erent than that advised by the audit
partner, implicitly challenged the partner’s claim
to accounting expertise (Power, 1997a) and under-
mined his ability to negotiate this issue and subse-
quent issues.
Audit partners exhibited great concern that the
national o?ce be on ‘‘the same page’’ as they were
prior to the consultation, implicitly recognizing
that the CFO ‘move’ of asking for a national o?ce
consultation was a challenge to their accounting
expertise. In fact, often the audit partner went to
the national o?ce prior to the CFO’s asking and
ensured that the national o?ce was ‘‘on side’’, in
order to present a united front. For example, the
audit partner of Company F, who had talked to
the national o?ce prior to the CFO’s requesting
it, explained the role of the national o?ce and
his view of the group:
I personally view our national o?ce as a sup-
port group. . . I’m pretty sure they were
involved at some point in time because,
again, it was a new area, looking for other
precedents of how other people had applied
376 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
to it. So we would have identi?ed the issue
ourselves and they would have supported
us in our discussions.
Similarly, the audit partner of Company D
explained how he uses the national consulting
group, ‘‘We talk [to national o?ce] and we say
OK, this is our position.’’ Here the audit partner
is attempting to circumvent or ‘turn’ this tactic
by determining national o?ce support for his posi-
tion. Hence, while the ‘move’ by the CFO to ask
for national o?ce consultation can challenge the
audit partner’s claim to expertise (Kolb, 2004b)
the audit partner can attempt to ‘turn’ it by con-
sulting national o?ce in advance of the client.
This attempt to prepare for such a ‘move’ can
be circumvented by the CFO. For example, Com-
pany G’s CFO directly contacted the national
o?ce himself to get the result he wanted:
Once when we had a situation and where the
partner was taking a very, very hard stand on
his particular interpretation of an emerging
issues release which I totally disagreed with
which led to a change in the partner the fol-
lowing year. I discussed it with their national
o?ce who, interestingly enough, took a
softer view of the interpretation than he
did. And it got to such logger heads that
we in fact did have a change in the engage-
ment partner the following year.
Interestingly, in this situation, when the audit
partner did not get support from the Canadian
national o?ce, he attempted another ‘turn’ by
escalating the issue to the international o?ce of
the audit ?rm. While the audit partner found lim-
ited initial support from the international o?ce,
the CFO described the outcome as, ‘‘Obviously
when push came to shove and this started to get
to the point where it had to be resolved, they
[the parent company national o?ce] didn’t see it
as hard and fast as he did’’ and thus, the CFO’s
position prevailed.
In the other cases, the CFO preferred not to
deal with the national o?ce sta? directly. The
auditor for company F explained, ‘‘[The client]
didn’t really want them [i.e., the national o?ce]
to be involved either. There are certain cases where
the client wants to deal with them, other cases
where the client wants to deal with us.’’ Again,
the audit partners at some level see the CFO
attempting to make a ‘move’ by the CFO’s choice
of whether to ask for national o?ce consultation.
The audit partner does not always necessarily
accede to the CFO’s wishes. Company D’s audi-
tor, referring to other engagements, stated that
with some clients, ‘‘We talk [to national o?ce]
and we say OK, this is our position. They don’t
directly deal with the [national o?ce] guys.’’ or
indeed know that the audit partner consulted
national o?ce. This again provides evidence that
the auditors can also perceive the CFO’s action
of not wanting national o?ce consultation as a
‘move’, with the partner seeking to ‘turn’ the situ-
ation by consulting anyway.
Challenging the underlying ideas
Another ‘move’ that the CFOs seem to com-
monly undertake is to complain extensively that
?nancial accounting does not take into account
the underlying economic substance of the transac-
tions in which their companies are engaged. For
example, Company A’s CFO was completely frus-
trated with the accounting treatment required for
the issue. Indeed in this case the CFO
enlisted the CEO, Board and audit committee to
challenge the audit partner’s position, based on
the lack of economic reality allegedly embedded
in the relevant accounting standards. The CFO
stated:
We probably had three meetings on it. They
produced a lot of literature research, they
produced actually from another transaction,
had another ?rm’s opinion on the range of
the way these kinds of convertible instru-
ments should be treated. . .. So there was a
lot of back and forth and there was, like I
try to keep the discussions more on the prac-
tical business side then is it paragraph 3 or 9
of this, because I trust [the] people that we
have internally plus the partner. . .. I mean,
they did an extensive amount of homework
on it. They searched other companies, we
forced them to go back and search more
companies, which they did and they reported
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 377
on. And so once they convinced me on the
issue and rami?cations of the issue then out
of a three hour board meeting we probably
spent almost an hour talking about this. . ...
he (the audit partner) was explaining it to
the three or four members of the audit com-
mittee in a lot of detail and so. . . for sure
they (the audit ?rm) felt a lot of pressure, per-
sonally, because they knew they were coming
up with an illogical result and they knew
again, that one, it was important to us and
two, none of us thought there was any kind
of logic involved in what the outcome was.
So it was more of, I think, of a personal long
term relationship pressure that they felt.
By describing the standard’s result as ‘‘illogi-
cal’’, the CFO is attempting to position the audit
partner via the claim that ?nancial accounting is
all about rules and is not about communicating
the economic reality of the transactions engaged
in by their companies. By questioning the underly-
ing accounting standards, the CFO is undermining
the auditor’s strongest position and arguments.
This ‘move’ is similar, in principle, to the ‘move’
of ‘‘demeaning the other side’s ideas’’ (Kolb,
2004b) identi?ed in social positioning research on
negotiation. After all, why bring a perfectly good
relationship into question over something as
pedestrian as accounting rules? Company F’s audit
partner illustrated how CFOs employ this
approach:
Their arguments were really a substance over
form type argument. So they were arguing
the substance of the transaction as such that
it should be presented in this way and that
unfortunately the rule’s very form driven
and would result in a di?erent result. So
[the CFO] is very much a substance over
form type of person. So his arguments were
largely from an economic, economic reality
view point, substance over form type view
point.
The auditor’s ‘turns’
It appears that the audit partners accept that the
CFO has agency in the relationships and ?nds the
CFOs’ ‘moves’ to be acceptable in the context of
the relationship type. In addition to the auditor
‘turns’ discussed previously, one of the main ‘turns’
documented in the social positioning literature is to
refocus the discussion on the substantive negotia-
tion issue. We found that the auditor frequently
‘turns’ the discussion towards the accounting stan-
dards and interpretations where the auditor gener-
ally has the expertise advantage. Company D’s
audit partner explicitly described that in reactive
relationships he has been in, the audit partner func-
tions more like a police o?cer enforcing the ‘‘stan-
dards.’’ In cases of clearly non-GAAP accounting,
the audit partner’s ‘turn’ involves the implicit or
explicit response of threatening to qualify the audit
report. This approach was con?rmed by the CFOs
in reactive relationships who consider the ?nancial
statements as theirs, and thus, will not change their
statements for anything short of a quali?cation. As
Company B’s CFO stated, ‘‘Unless it’s absolutely,
fundamentally, qualifying material, then I won’t
change.’’
The auditor’s ‘move’
While all audit partners in reactive relation-
ships volunteered examples of how they had pro-
active relationships with other clients and
maintained they were undertaking steps to change
the present reactive relationship towards a proac-
tive one, they indicated that it takes time for a
relationship to mature into a proactive one.
Beyond this waiting for a relationship to mature
or knowing the CFO ‘‘better’’, we could not ?nd
other ‘moves’ that the audit partners were taking
to position the CFO into accepting a more proac-
tive auditor role. Indeed, as illustrated in three of
our dyads, a previous audit partner pushing for a
more proactive relationship led to audit ?rm man-
agement removing that partner from the engage-
ment. Hence, it appears that the CFO in auditor
client management negotiations has the ability
to make strong ‘moves’ to position the auditor’s
role in the relationship, whereas the auditor has
no ‘moves’ to position the CFO. Furthermore,
the audit partner replies to the CFO ‘moves’ with
‘turns’, only if absolutely necessary, hence putting
the auditor on the defensive at the start of many
negotiations.
378 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
E?ects of the ‘shadow’ negotiation on the
substantive negotiation
This section examines the e?ects the ‘shadow’
negotiation can have on the negotiation over sub-
stantive accounting issues hinted at but not
explored so far in our analysis.
Process
As illustrated by our analyses, the relationship
de?ned by these underlying negotiations deter-
mined when the issue was identi?ed, the role the
audit partner was to play, how both sides pre-
sented their arguments, and the nature of the pro-
cess required to resolve the issue. For example, in
the dyads where there is a long-term proactive
relationship between the CFO and audit partner,
both parties claimed they could quite easily predict
the other side’s position, arguments and bargain-
ing strategy. The CFO of Company C captured
this when describing how the audit partner dealt
with the issue, ‘‘We’ve got a great working rela-
tionship, he knows where we’re coming from . . .,
and we both know that neither of us are going to
screw each other.’’ In contrast Company E’s audit
partner, who had just become the engagement
partner, observed that for this client the relation-
ship is ‘‘. . . not particularly well developed at this
point in time. So . . .we are still learning how to
work with each other and so it’s a bit tentative.’’
Our analysis of the descriptions of the negotia-
tion process given by both parties indicates that
reactive dyads had a much more di?cult time
negotiating. In particular, for the two issues dis-
cussed for Company G, the CFO was entrenched
in his position and would not even contemplate lis-
tening to the audit partner’s view. For example,
when describing the audit partner’s position and
viewpoint, he stated, ‘‘Oh, yes. He absolutely went
away and thought about it. And then came back
with the wrong answer.’’
This is not to say, however, that all areas of the
substantive negotiation process di?ered due to
relationship type. The theme of the parties sharing
their starting position and research with the other
party, once the issue had been identi?ed by both
sides, was consistent across both types of relation-
ships. All dyads, except Company G, described
themselves as working collaboratively to resolve
the issue. In all cases, both parties claimed they
kept each other informed on a ‘‘timely’’ basis, even
in the reactive relationships, although what is seen
as ‘‘timely’’ di?ered greatly between the dyads in
reactive and proactive relationships. The auditor
for Company F, in a reactive relationship, stated,
‘‘We would provide our interpretation [account-
ing]. He would provide us more information [about
the transaction]. . .So it’s an iterative process.’’
Potential solutions considered
The proactive/reactive nature of the dyadic
relationship shaped the types of alternatives for
which the audit partner would search. In the pro-
active relationships, we found the emphasis was on
information gathering to determine the interpreta-
tion of GAAP that was most appropriate and
defensible to third parties. In the reactive relation-
ships, the auditors indicated that they ?rst
searched for information to support the CFO’s
position or desired accounting outcome. For
example, Company B’s auditor (reactive relation-
ship) stated that ‘‘we did look for . . . compensating
[items], I mean he did. . . . We had a couple of other
issues which we were going to pass on but they got
him part way back to where he wanted to be on
this earnings per share.’’ Company D’s CFO,
summed up his view of the reactive process:
We exchanged views on it. I suggested that
this is a new area and we are one of the ?rst
ones o? the block and I said I know another
company, a well-known company in the US,
who made some major acquisitions, can you
please go look and see how they did it and I
don’t think, we don’t need to necessarily, I
don’t believe we are the ones inventing the
wheel here but this is my interpretation and
I’m sure as a business person this is how I
think people will globally interpret it. So they
agree after the meeting to do some more
research and in the end they came back and
they supported our position. They said no,
your interpretation of that is correct and
they’ve seen some information on it and they
are comfortable in the end with resolving the
issue.
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 379
In this description, there is no consideration of
whether this is the most appropriate, defensible
or the ‘best practice’ interpretation of GAAP. As
long as someone else had done it and the resulting
accounting is in accordance with the CFO’s wishes,
information search and analysis ended when such
an example was found (see Salterio, 1996 for archi-
val collaboration of this point). Thus, once again
this demonstrates the CFO’s desire for the ?nancial
statement to represent economic reality, not just
compliance with the ‘‘misleading’’ rules. The argu-
ment is that if others are doing it, it must be okay
and probably better communicates the results –
who cares about GAAP?
Overall, our interviews show that the ‘shadow’
negotiation a?ects what happens in the substantive
negotiation process, especially in the set of alterna-
tive resolutions considered, including the alterna-
tives that the auditor brings forward to the
negotiation table.
Conclusions: expanding our understanding of
accounting negotiation
This paper is the ?rst to examine the ‘shadow’
negotiation of the relationship and roles that takes
place simultaneously with the negotiation over the
substantive issue in the accounting setting. This
research provides new insights into both how the
roles and relationship are (re)negotiated and the
CFO’s commanding position in that process.
By focusing on the dyadic negotiation setting,
as opposed to the individual parties, our research
adds to the general body of knowledge about
accounting negotiation. First, we ?nd that the
audit partner’s overall role, both in the eyes of
the partners and CFOs, was to manage the rela-
tionship so that it would be considered ‘‘good’’
by both parties. Second, there appear to be two
principal types of relationships between CFOs
and audit partners, proactive and reactive, with
both relationship types determined by the CFO’s
expectations and shaped by his actions. Those
dyads that we characterize as being in proactive
relationships feature a CFO who consulted with
the audit partner as soon as he identi?ed a poten-
tial issue with the goal of ensuring accounting and
disclosures that were beyond question by third
parties, like ?nancial analysts. Those dyads we
characterize as being in reactive relationships fea-
ture CFOs who wait until year-end or later to tell
the auditor about an issue, if the CFO tells the
auditor at all. In the former case, the CFO is delib-
erately ceding agency (Kolb, 2004b) to the audit
partner and bestowing on the auditor the power
to ensure compliance with all reasonable interpre-
tations of GAAP. In the latter case, the CFO
actively contests any proposed changes in his
accounting and actively challenges the legitimacy
of the auditor’s position.
Third, as a result of the audit ?rm’s emphasis
on ‘‘happy’’ client management, in three of our
dyads, the audit partner, who was attempting to
change the relationship towards a more proactive
one, was replaced by the audit ?rm, with a partner
willing to accept the reactive relationship and the
police o?cer role. In two of the three dyads, this
replacement was achieved by the CFO complain-
ing; in only one dyad did the change occur due
to the CFO putting the audit out to tender. The
complicity of audit ?rm management in respond-
ing to the CFO wishes is illustrated as well by
the ?rm’s response to the dyad where, at the
request of the CFO, a more accommodating audit
partner was replaced with a partner who would
only deal with clients in the context of an expert
advisor role in a proactive relationship.
Fourth, our analysis shows that the CFO has
several ways to ‘move’ the auditor role towards
what the CFO wants in a relationship. Besides
the threat to end the relationship, the CFOs can
challenge the audit partner’s accounting expertise
by strategically asking for a second opinion from
the audit ?rm’s national o?ce as well as attacking
the underlying importance of GAAP based
accounting by claiming it was ‘‘illogical’’ and not
re?ective of economic reality. The auditor may
attempt to ‘turn’ these ‘moves’ by consulting the
national o?ce before the client asks and employ-
ing his accounting expertise to document, in depth,
the general acceptance of the so-called ‘‘illogical’’
GAAP, or the audit partner might even go further
by going to the international o?ce if the national
o?ce is not onside with his views. Fifth, while
the auditor exhibits some responses to CFO
380 S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383
‘moves’, the audit partner does not seem to have at
his disposal e?ective ‘moves’, other than the pas-
sage of time and getting to know the CFO better,
to position the relationship to the auditor-desired
‘‘ideal’’ proactive relationship.
Overall, we can see that the ‘shadow’ negotia-
tion exists in the audit realm and can sometimes
lead to the auditor being put in a defensive position
right from the start of the substantive negotiation.
Audit partners in reactive relationships have to
carefully weigh the seriousness of the accounting
issue against the damage a confrontation would
have on the relationship with the CFO. Police o?-
cer auditors in this type of relationship are charged
with ensuring their clients ?nancial statements
comply with minimal technically correct GAAP,
rather than quality or appropriateness of the
accounting or disclosures. On a more positive note,
expert advisor auditors in proactive relationships
are given the responsibility of ensuring that the
?nancial statements are beyond reproach, with
the CFOs somewhat ceding responsibility for high
quality ?nancial reporting to the audit partner.
One requirement of the U.S. Sarbanes-Oxley
Act (SOX) that may give an auditor a new ‘move’
to employ in positioning the relationship with the
CFO is the requirement under SOX Section 204
(SOX, 2002) that the auditor must disclose his
‘‘preferred’’ accounting, not just the acceptability
of the accounting, to the audit committee. Fur-
thermore, the requirement that the audit commit-
tee engage the auditor (SOX, 2002, Section 301)
may reduce the ability of the CFO to threaten to
put the audit out to tender. However, a study of
auditor turnover suggests that in the post-SOX
period auditor turnover has increased, not
decreased, making it potentially easier for the
CFO to execute such a threat (Reilly, 2006;
Turner, Williams, & Weirich, 2005).
Limitations
Our CFOinterviewees came froma wide range of
industries, company sizes, and ?nancial sophistica-
tion and our audit partner interviewees ranged from
industry specialists with large local resources to
draw on to general audit partners at more remote
o?ces, however, they were not solicited to partici-
pate based on any random sampling plan, hence
they may not be representative of all Canadiancom-
panies and ?rms. However, not one CFO we con-
tacted declined to be interviewed. Also, there is
always concern that the individual interviewees
have selective recalls of the event. In this research
the similarity in the recalls of ?ve dyads discussing
the same issue suggests this is a minor concern.
Further, our interviews took place just prior to
passage of the Sarbanes Oxley Act (SOX, 2002).
The passage of the Act and the subsequent interna-
tional changes in the audit environment may moti-
vate audit partners to develop ‘moves’ that position
themselves as the expert advisor auditor in proac-
tive relationships that they claim is ‘‘ideal’’. How-
ever, the evidence is far from clear on that point.
Initial reports suggest there was a ‘‘chill’’ (e.g.,
Millman, 2005; PCAOB, 2005) in communications
between the auditor and client management in the
?rst years after SOX. Client management previ-
ously in a proactive relationship found that audit
partners would no longer give them advice about
their accounting (Millman, 2005). Indeed, in May
2005, the regulator itself urged auditors to not dis-
engage from management’s accounting questions
(PCAOB, 2005). Hence, the immediate impact of
SOX might well have been to increase the number
of reactive relationships where the auditor only
learns of the issue after the fact as part of a quar-
terly audit/review or year-end audit.
Finally, the increased attention on the audit
committee might well lead to more extensive
involvement of that committee than has been doc-
umented to date (e.g., Cohen, Krishnamoorthy, &
Wright, 2002; Gendron & Be´dard, 2006). How-
ever, in the case where we were asked to interview
the audit committee chair, we found no new
insights or, indeed, any discrepancies with what
the CFO and partner reported. Future research,
however, will need to consider whether any exam-
inations of accounting negotiation should include
the triad of the CFO, audit committee and the
audit partner, rather than our dyadic approach.
A ?nal word: contextualizing negotiation
Overall, our analysis of dyads aids us in identi-
fying factors in the ‘shadows’ of negotiation that
S. McCracken et al. / Accounting, Organizations and Society 33 (2008) 362–383 381
appear to a?ect the process and the substantive
outcome of negotiation. By incorporating this
more contextualized understanding of the dyadic
relationship, archival researchers, analytical
researchers and experimental researchers have
additional avenues to pursue in investigating fur-
ther the opaque world that is negotiation over
accounting policies, disclosures and measurement
that underlie the creation of the modern ?nancial
statements.
Some areas worth pursuing might include: (1)
investigating additional audit partner–CFO
dyads, but with a concentration on dyad types
that may have di?erent ‘shadow’ negotiation
dynamics, for example, those involving women,
senior or junior partners, or di?erent industries;
(2) determining how the audit ?rms deal with
audit partners who are not able to adapt to
CFO-de?ned roles; (3) examining whether the
‘shadow’ negotiation and underlying relationship
change when the client receives or has received a
modi?ed or quali?ed opinion, restatement, or
been subject to a regulatory investigation; (4)
exploring how certain audit partners, for example,
a rigid, conservative partner, relate to di?erent cli-
ents and whether CFOs position these partners in
similar or dissimilar roles; and (5) probing the new
three-way relationship due to the increased weight
being given to the audit committee in the prepara-
tion of the ?nancial statements to determine
whether these negotiations are being played out
di?erently.
In addition, given our perhaps troubling ?nding
that auditors appeared to be giving the CFOs the
upper hand in positioning during the ‘shadow’
negotiation by not applying ‘moves’ themselves,
future work might investigate whether there are
other ‘moves’ that the audit partner uses. Alterna-
tively, researchers could develop ‘moves’ and
experimentally test ones that would be appropriate
for audit partners in order to level the playing ?eld
in these situations.
Acknowledgements
Thanks to the Canadian Institute of Chartered
Accountants through the Canadian Academic
Accounting Association and to the Social Sciences
and Humanities Research Council for generous
?nancial assistance. Excellent research assistance
has been provided by Guoping Liu (then Ph.D.
student), Brad Pomeroy (then master’s student)
and Rawan El khatib and Pam McIntryre (then
co-op students). Comments from participants at
workshops and conferences including the Univer-
sity of Saskatchewan, University of Toronto,
HEC Montreal, University of Alberta, AAA An-
nual Meeting, CAAA Annual Conference,
Queen’s School of Business Field Research in a
North American Context Conference, Cornell
University and Boston College are very much
appreciated. Individual comments have been re-
ceived from Fred Phillips, David Saunders,
Vaughan Radcli?e, Yves Gendron, Chris Chap-
man, Thomas Ahrens and Clinton Free, as well
as two anonymous reviewers.
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