The ABO Reporter

Negotiation in Accounting and Auditing:
The Intersection and Need for Research

By Sean A. Peffer, University of Kentucky

Although many accounting and auditing interactions involve negotiation (Murnigham and Bazerman 1990), research on negotiation in accounting settings has been limited. The purpose of this article is to briefly discuss the relationship between negotiation and accounting, the current state of negotiation research in accounting and possible areas for future research. Negotiation is a means of resolving conflict. Organizations are made up of individuals and groups of individuals all of whom have different motivations and goals arising from situational and individual characteristics. Conflict between these parties can arise from objective or perceived incompatibility of goals or actions (Hocker and Wilmont 1985). With the increasing emphasis on employee empowerment and decentralization, negotiation is becoming a more widely used method of resolving this conflict.

Negotiation and accounting can intersect in at least three ways. The first intersection involves settings in which an accountant is one of the parties involved in the negotiation process. For example, an auditor and client may have to negotiate an audit fee. Second, the negotiated variable may be an accounting number. Examples include two divisions determining a transfer price or a manager and employee negotiating a budget. Third, accounting information can be used to support a negotiation strategy or bolster a negotiator's position. For example, in a collective bargaining setting, employees and management might use firm profit to bolster their negotiation position. The negotiation dynamics of all three settings provide opportunities for negotiation accounting research.

The Current State of Negotiation Research in Accounting and Auditing
The existing research on accounting negotiation has focused on three primary areas: transfer pricing, budgeting, and collective bargaining. This section will provide a brief overview of some of the studies that have been done in these areas. Albeit incomplete, this overview should provide a starting point for researchers interested in the area.

Transfer Pricing
The transfer pricing setting is (by far) the most extensively studied negotiation area. The transfer price is the internal value assigned to a product or service when it is exchanged between segments of an organization. The desires of the selling and buying divisions are typically to maximize individual performance, thus, giving rise to conflict. Negotiation is one vehicle to resolve the conflict. The independent variables examined in this research stream can be categorized into individual and situational variables. Individual variables include risk preferences and tolerance for ambiguity (Viator et al. 1992, Ghosh 1994b). Other studies have examined the effect of situational variables on transfer pricing outcomes: computer vs. face to face interaction, buyer strategy, level of interdependence, incentive scheme, arbitration, mediation, market uncertainties, number of periods, divisional product importance, market price availability and presence of negotiation (Arunachalam and Dilla 1992, Viator et al. 1992, Greenberg et al. 1994, Ackelsberg and Yukl 1979, Chalos and Haka 1990, DeJong et al. 1989, Ghosh, 1994a). The dependent variables studied can be categorized into: economic outcomes, behavioral outcomes, and negotiation process variables. The economic outcomes examined include: firm profit, division payoffs, individual payoffs, and equality of resource distribution (Greenberg et al. 1994, Ghosh 1994a, Arunachalam and Dilla 1992, Viator et al. 1992, DeJong et al. 1989, Chalos and Haka 1990, Ghosh 1994b). Behavioral outcomes studied include: perceived autonomy, perceived fairness of settlement, perceived trust, and level of divisional conflict (Greenberg et al. 1994, Amernic and Aranya 1990, Ghosh 1994a). Negotiation variables studied include: efficiency of the process, bargaining disposition, truthful reporting and likelihood of agreement (Greenberg et al. 1994, DeJong et al. 1989, Amernic and Aranya 1990).

The budget setting differs from the transfer price setting in at least two fundamental ways. First, there is seldom any chance for mediation or arbitration in budgeting. One of the parties (typically the manager) has the power to set the budget should a negotiation impasse occur. Second, the negotiators' compensations depend upon both the negotiated number (the budget) and the future performance of one of the negotiators (the subordinate). Thus, results from transfer pricing are not directly transferable to the budget setting context.

Almost all large and medium sized firms prepare formal operating budgets for planning and motivation (Rachlin and Sweeney 1993) and many of them set the budgets through a negotiation process (Anthony et al. 1994). While there are numerous papers examining the budget setting process, most papers have focused on settings where subordinates unilaterally set budgets and superiors accept whatever budgets are set (see, e.g. Chow et al. 1988, 1991). Two studies have started the investigation into budget negotiations: Elias and Notz (1996) and Fisher et al. (2000). Elias and Notz examined negotiation between two subordinates for a limited resource. They found that negotiation in empowering organizations resulted in higher rewards, subject satisfaction, trust, and information sharing. Fisher et al. (2000) looked at the effect of negotiator power when superiors and subordinates negotiate the subordinates' budget. They found that power and whether the negotiators reach agreement are important in explaining negotiation outcomes.

Collective Bargaining
Accounting data may provide information on the abilities and resources of the negotiating parties. Several collective bargaining studies have examined the role of financial information in determining negotiator attitudes prior to negotiation (Clarke et al. 1990, Tyson 1994, Yamaji 1986, Mautz 1990). Two studies have directly examined the intersection of accounting information, negotiation and collective bargaining: Amernic (1985) and Elias (1990). These studies have shown that accounting information can affect negotiators' perceptions, strategy, and negotiation outcomes. In particular, financial information about a negotiator's partner affects the perceived ability of that partner to make concessionary offers.

Avenues for Future Research
As noted previously, most negotiation research has concentrated on transfer pricing. Negotiation is also used in many other accounting related settings. Resolving auditor/manager opinion differences and setting budgets, salaries, audit fees, and time budgets are just a few of the other tasks that may require negotiation. To the extent that these settings differ from the transfer pricing setting, research is needed to understand the dynamics of negotiation in these tasks as well.

Another area for a substantial contribution is through theory building. Past research has been piecemeal. Most studies manipulate only one variable at a time and little attempt is made to provide an integrated view. There exists a host of individual and situational variables that potentially impact negotiation outcomes. A non-exhaustive list follows:

Individual Variables Situational Variables
Overconfidence in Judgement Financial Incentives
Perspective Taking Ability Time Pressure
Race, Age, Religion Presence of Audiences
Risk Preference Accountability
Locus of Control Site Neutrality
Cognitive Complexity Site Openness
Tolerance for Ambiguity Organizational Culture
Self Concept Task Difficulty
Motives Framing
Attitude Number of Periods
Cooperativeness Controllability Filter
Authoritarianism Social Pressure
Machiavellianism Information Symmetry

More work needs to be done to identify the effect of these variables on negotiation outcomes. The ultimate goal of this research should be to develop and test a comprehensive model that includes multiple negotiation factors, actors and outcomes. Finally, future research needs to address methodology. Much accounting negotiation empirical research has been carried out through experimental analysis, and the weaknesses inherent in this approach must be considered when interpreting the results. Most of the studies involve simple bilateral monopoly negotiation between two student subjects over a single period. Negotiation in the real world involves multiple experienced parties or groups over numerous periods. While adding control, the current experimental analysis leads to potential external validity and experiment superficiality problems.


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