Client’s Bargaining Power and Audit Negotiation over Earnings: Evidence from Audit Processes in a Business Groups Environment

Pyung Kyung Kang, Yoo Chan Kim, Dan Palmon

Research output: Contribution to journalArticlepeer-review

Abstract

This paper identifies and analyzes contextual factors in the audit environment at the business group level, and finds that the structural complexity of business groups and business group owners’ controlling power are significant factors that may influence auditor behavior during the audit negotiation process. Using data for the pre-audit earnings that is uniquely available in South Korea, we find that business group affiliation and the existence of circular control links within business groups are significantly and positively associated with auditors’ agreement regarding earnings initially proposed by the management of client firms. We also find that both owners’ excessive voting rights over cash-flow rights and related party transactions are significantly positively associated with auditors’ agreement regarding the earnings initially proposed by the management of client firms. Our findings will help elucidate the contextual factors that can impact clients’ bargaining powers in audit negotiation processes.

Original languageEnglish (US)
Pages (from-to)1207-1238
Number of pages32
JournalGroup Decision and Negotiation
Volume29
Issue number6
DOIs
StatePublished - Dec 1 2020

All Science Journal Classification (ASJC) codes

  • Decision Sciences(all)
  • Arts and Humanities (miscellaneous)
  • Social Sciences(all)
  • Strategy and Management
  • Management of Technology and Innovation

Keywords

  • Audit service
  • Auditor independence
  • Bargaining power
  • Business group
  • Negotiation

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