Auditor-Auditee Negotiation Outcome: Effects of Auditee Business Risk, Audit Risk, and Auditor Business Risk in Tunisian Context

Manuscript Type: Empirical Research Question/Issue: This study seeks to investigate the impact of auditee business risk, audit risk, and auditor business risk evaluation on auditor-auditee negotiation outcomes. A model is developed and tested that characterizes the auditor-auditee negotiation outcome as a process of risk evaluation and risk adaptation. Research Findings/Insights: An experiment was conducted using 200 Tunisian auditors as participants. The results show that the partners considered the relationship between audit risk and auditee business risk. Also, our results indicate that auditee business risk has a significant effect on auditor-auditee negotiation outcomes. So, auditors will be less likely to accept an auditee's aggressive reporting practice when the auditee's business risks are high. On the other hand, results show that audit risk evaluation don't affect auditor-auditee negotiation outcome. Finally, auditor business risk has a non-significant effect on auditor-auditee negotiation outcome. Theoretical/Academic Implications: This study provides evidence that despite the expectation of conservatism required by generally accepted auditing principles (GAAP), certain environmental factors may cause auditors to acquiesce to auditee preferences and allow more aggressive reporting. From stakeholders' (e.g., investors, regulators) perspective, this is not necessarily an optimal criterion for decisions that impact the financial statements. The expectations of stakeholders are that auditors will select the most informative alternative. Practitioner/Policy Implications: The implication for practice is that accounting firms may need to strengthen their internal oversight mechanisms (e.g., peer reviews, concurring partner reviews) to ensure that auditors' decisions are aligned with the firm's, as well as stakeholders', expectations of audit quality. So, auditors must pay more attention to financial statements when business risk is high.