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.
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
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.
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.
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
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
|Race, Age, Religion
|Locus of Control
||Number of Periods
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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