The effect of gender and firm identification on auditor pre-negotiation judgments

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The effect of gender and firm identification on auditor pre-negotiation judgments☆ ⁎

Joanne Jonesa, Carolyn MacTavishb, , Wendy Schultzc a

Faculty of Liberal Arts and Professional Studies, York University, Keele St., Toronto 4700, ON, Canada Lazaridis School of Business and Economics, Wilfrid Laurier University, 75 University Ave., Waterloo, ON, Canada c Asper School of Business, University of Manitoba, 181 Freedman Cres., Winnipeg, MB, Canada b

A R T I C LE I N FO

A B S T R A C T

Keywords: Audit negotiations Gender Firm identification Social identity theory Role representation

This paper extends current auditor negotiation research by considering the effects of two dimensions of auditors' identity that are posited to be relevant to auditors' negotiation: gender and audit firm identification. Women earn over half of college degrees in accounting, and hold more than half of accounting and auditing positions in the US, yet the balance of the gender of partners at audit firms is currently not equal (AICPA, 2017). However, as more women advance into partnership positions in firms, it is increasingly important to have an understanding of how gender affects the behaviors, processes and outcomes of negotiation, and thus the quality of financial statements. The auditor-client negotiation context has features, such as ambiguity and representation of others that can “trigger” the salience of auditors' gender and firm identity. Once salient, these two dimensions of auditors' identity shape auditors' motivational orientation towards negotiations, which, in turn, affects the auditors' negotiation behavior and negotiation outcomes. The study finds that male and female auditors approach the negotiation over audit adjustments differently. Although many negotiation studies find that males negotiate more aggressively than do females, auditor-client negotiation offers a unique setting that has been found to reverse this common trend. We hypothesize and find that female auditors recommend higher audit adjustments than males. However, the level of firm identification moderates female's recommended audit adjustments such that at higher levels of firm identification, the larger audit adjustments recommended by females decrease. This finding is consistent with the growing research on gender differences in auditing and the research on gender and risk tolerance, which find females to be more risk averse, but contrary to much of the negotiation research which shows males as more aggressive and achieving higher negotiated outcomes. In supplemental analysis, we find that our results hold in the senior manager subsample but not in the partner subsample. This result is consistent with theory on gender differences which suggests that the differences will disappear with increased occupational socialization (Smith & Rogers, 2000). Practical implications are discussed.

1. Introduction It is well recognized that many financial statement accounts are based upon estimates that involve considerable judgment (Gibbins & Mason, 1988; Gibbins, Salterio, & Webb, 2001; Hatfield, Agoglia, & Sanchez, 2008). As a result, auditors and client management often negotiate the resolution of certain contentious issues in order to avoid a

modified audit opinion (Antle & Nalebuff, 1991; Beattie, Fernley, & Brandt, 2001; Gibbins et al., 2001). In these negotiations, auditors are expected to ensure the public interest is paramount and to “stand tough” (Glater, 2003).1 The negotiation literature has generally shown that a key predictor of auditors' “toughness,” or “firmness,” is their motivational orientation (Olekalns & Smith, 2003; Pruitt & Carnevale, 1993). Weingart, Bennett,

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This paper has benefited from the helpful comments from Giselle Durand, Darren Henderson, Regan Schmidt and Janet Morrill. Helpful comments on an earlier version of this paper were provided by Jacob Wolpin, Anne Fortin and participants at the Canadian Academic Accounting Association Conference. Financial support was gratefully received by York University – Atkinson Research Fellowship. ⁎ Corresponding author. E-mail addresses: [email protected] (J. Jones), [email protected] (C. MacTavish), [email protected] (W. Schultz). 1 Stand tough is analogous to what negotiation researchers refer to as “firmness” – where negotiators set high goals and are unwilling to make concessions (Pruitt & Carnevale, 1993). https://doi.org/10.1016/j.adiac.2018.12.003 Received 27 June 2018; Received in revised form 5 December 2018; Accepted 11 December 2018 0882-6110/ © 2018 Elsevier Ltd. All rights reserved.

Please cite this article as: Jones, J., Advances in Accounting, https://doi.org/10.1016/j.adiac.2018.12.003

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accounting choices (Francis, Hasan, Park, & Wu, 2015). Similarly, Hardies, Breesch, and Branson (2016) find that Belgian female auditors are more likely to issue going concern opinions, and suggest that females are more aligned with a high-quality audit and considerate of the needs of the users' of the financial statements. Therefore, we expect that females will recommend higher audit adjustments than males. Auditors belong to engagement teams, audit firms and professional organizations which create group member identity (King, 2002). Research shows that the context can make certain identities relevant and salient (Bowles et al., 2005; Kramer et al., 1993). Identities can become accessible because they are “valued, important or frequently employed and/or because they are perceptually salient (situationally relevant)” (Hogg & Terry, 2000, p. 125). Firm identification is a specific form of social identification in which individuals define themselves in terms of their membership in a particular firm (Mael & Ashforth, 1992). Accounting firms are in a constant state of tension because auditors have a fiduciary duty to investors and creditors to act on their behalf, yet at the same time, they run a business and strive to be financially successful. To do that, auditors need to maintain their professionalism, while also balancing their relationship with their clients. The firms want to keep their clients happy, and thus try to balance the needs of both the users' of the financial statements along with the client's wishes when possible. When there are choices within Generally Accepted Accounting Principles (GAAP) or discretion when making estimates, an auditor may be able to defend a wide variety of options or estimates.2 Thus, the auditors' motivational orientation may be more focused on the firm and the needs of the firm, which will drive them to try and find a solution that will work for everyone. Defining the self in collective terms leads one to experience the collective interest as self-interest (Ashforth & Mael, 1989; Hogg & Terry, 2000; van Knippenberg, 2000). Therefore, an auditor identifying highly with the client is inclined to act in the interest of that client (i.e., Bamber & Iyer, 2007; Bauer, 2015; Stefaniak, Houston, & Cornell, 2012; Svanberg & Öhman, 2015), and an auditor identifying highly with the audit firm is expected to act in the interest of their firm. Therefore, we expect that at higher levels of firm identity, gender identity will be less salient, and differences between females' and males' recommended audit adjustments will decrease. The participants in this study are 104 auditors who hold senior positions (senior managers and partners) in two Big 4 firms. These highly experienced auditors are given a case-based scenario in which the audit team has recommended an audit adjustment to the audit partner for a warranty provision with an uncertain estimation range. The CFO has indicated that the adjustment may jeopardize the company's ability to obtain additional financing and that management does not want to record any additional adjustments to the financial statements. The auditors are asked to decide on the recommended audit adjustment (i.e., the amount they recommend to the client to be recorded in the financial statements). We find that females recommend higher adjustments to the client. This suggests that the gender variable may be significant in the auditorclient negotiation setting. We also show that both gender and firm identification interact to affect audit adjustment decisions. In particular, the level of firm identification moderates female's recommended audit adjustments such that at higher levels of firm identification, the larger audit adjustments recommended by females decrease. In supplemental analysis, we find that our results hold in the senior manager subsample but not in the partner subsample. The findings demonstrate the relevance of gender, firm identification, and rank to understanding auditors' pre-negotiation decisions regarding estimates. This study contributes to the auditor negotiation literature by

and Brett (1993, p. 505) define motivational orientation as a generalized goal that both directs and limits behavior. Social identity theory represents a powerful perspective for understanding negotiators' motivational orientation (Haslam, 2004; Kramer, Pommerenke, & Newton, 1993). Auditors' social identity has been identified as an important lens in the auditing literature (Bamber & Iyer, 2002, 2007; Bauer, 2015). Bamber and Iyer (2007) demonstrate that social identity - in particular, professional and client identification - has an impact on auditors' negotiation behavior. However, auditors' social identity is a multi-dimensional construct, and negotiation research generally demonstrates that other dimensions of social identity, depending upon their relevance to the negotiation context, can have a powerful impact on negotiators' motivational orientation (Bowles, Babcock, & McGinn, 2005; Druckman, 2001; Huo, Smith, Tyler, & Lind, 1996). This paper draws on social identity theory (Tajfel & Turner, 1985) and extends current auditor negotiation research by considering the effects of two dimensions of auditors' identity that are relevant to auditors' negotiation - gender and audit firm identification - on recommended audit adjustments. Negotiation research finds that the structure of the negotiation context can make certain identities relevant and salient (Bowles et al., 2005; Kramer et al., 1993). The auditor-client negotiation context has features, such as ambiguity and representation of others, which may “trigger” the salience of auditors' gender and firm identity (Bowles et al., 2005; Snyder & Ickes, 1985). Once salient, these two dimensions of auditors' identity shape auditors' motivational orientation towards negotiations, which, in turn, affects the auditors' negotiation behavior. In recent years, gender has become a central issue within the accounting profession - the focus being on how to overcome the invisible or artificial barriers, or what is referred to as the “glass ceiling,” that prevent women from occupying senior positions within the profession. For instance, women earn more than half of college degrees in accounting, and hold more than half of accounting and auditing positions in the US, but only approximately 22% are partners and principals (AICPA, 2017; Deloitte, 2017; Franzel, 2014). Despite a lack of parity of gender at the highest level, as more women do advance into partner positions in audit firms, it is increasingly important to have an understanding of how gender affects the behaviors, process and outcomes of negotiation, and thus the quality of financial statements. While the notion that gender diversity in organizations improves the quality of decisions is widely accepted within the professional and gender literature (AICPA, 2016; Richard, Kirby, & Chadwick, 2013), the majority of audit research assumes that since male and female auditors receive the same education and training, they will make similar financial statement negotiation decisions (Smith & Rogers, 2000). Yet the broader negotiation literature finds gender can result in differences in negotiated outcomes in some contexts (Bowles et al., 2005; Hong & van der Wijst, 2013; Kray & Thompson, 2004; Stuhlmacher & Walters, 1999; Walters, Stuhlmacher, & Meyer, 1998). Although research has drawn mixed conclusions regarding the success of men and women in negotiation, the finding is usually limited to “no difference” or a pattern that men gain greater negotiation outcomes than women (Miles & Clenney, 2010; Stuhlmacher & Walters, 1999; Rubin & Brown, 1975). A meta-analysis by Stuhlmacher and Walters (1999) reaches the conclusion that men outperform women, primarily focusing on outcomes gained by performance in dividing value. This pattern has also been shown in creating value (Miles & LaSalle, 2009). This pattern is not new. In a 1970 review of the literature, Bartos (1970) concluded that men appear to be “tougher” negotiators than women where toughness was found to be associated with a higher final payoff. However, particularly relevant to the current study is recent research that shows women can be more competitive than men in certain circumstances, particularly when they act as representatives, a key feature of all audit negotiations (Bowles et al., 2005; Croson, Marks, & Snyder, 2008). Furthermore, women have been found to be more risk-averse (Byrnes, Miller, & Schafer, 1999) and more likely to make conservative

2 The audit team may choose options that are not at the extreme ends of the range of estimates. A “middle-of-the-range choice” is a fairly realistic depiction of auditors' current approach to handling estimates (Clor-Proell & Maines, 2014).

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2.2. Gender and auditor negotiations

considering the effects of two social-psychological factors - gender and firm identification. Given that most audit negotiation research has focused more on economic incentives, engagement risk and issues related to GAAP (Brown & Wright, 2008), this study provides further support for the importance of social-psychological variables in audit negotiations. It also contributes to the small but growing auditor and gender literature by demonstrating that gender is a relevant variable when considered in the appropriate context (i.e., Chung & Monroe, 2001; Francis et al., 2015; Hardies et al., 2016). Furthermore, we add to McCracken, Salterio, and Schmidt (2011) which shows that managers and partners have different negotiating strategies, by finding this applies to pre-negotiation judgements as well. These findings have important implications for the audit profession. First, the study highlights that gender does matter in auditor-client negotiations. Therefore, audit firms should incorporate gender issues into their auditor negotiation training materials. As greater numbers of women advance into upper-level positions in firms, it is increasingly important to have an understanding of how gender affects the behaviors, processes and outcomes of negotiation (Stuhlmacher & Walters, 1999). A particularly useful technique is to discuss gender when debriefing results of negotiation exercises. These findings also suggest that firms should consider mixed-gender audit negotiation teams for their potential to ensure high-quality negotiation decisions. Finally, while audit firm management strives to cultivate loyal employees who will put the firm's interests first, they should be careful as auditors who identify highly with the firm may be considering both their responsibilities to act in the best interests of the users of the financial statements while also recognizing the commercial interests of the firm, and thus may be trying to find a balance that may satisfy all objectives. The remainder of the paper is organized as follows: the next section reviews the relevant literature and develops the research hypotheses. This is followed by a description of the methodology and presentation of the results. The final section discusses the results and their implications for the audit profession and researchers.

While gender is a topic that has received considerable attention in the broader negotiation literature (Bohnet & Bowles, 2008), there has been sparse attention devoted to this topic by accounting researchers (Birnberg, 2011). Some theorists argue that as professional expertise increases and power differentials decrease, gender differences will disappear (Kolb, 1992; Smith & Rogers, 2000). However, research in other professional contexts, such as bankers and investment fund managers, has shown that gender differences persist despite the fact that the men and women in the studies held similarly high levels of expertise and power within their organizations (Barber & Odean, 2001; Watson & Robinson, 2003). Social identity theory predicts that the influence of gender on negotiations is contingent upon the subjective importance of the gender identity and situational factors that make gender salient (Ashforth & Johnson, 2001; Bohnet & Bowles, 2008). Therefore, one would not expect men and women to behave differently across all negotiation contexts; rather, they will behave differently when gender is either subjectively or situationally relevant. Bowles et al. (2005) identify two categories of situational factors that make gender salient in negotiations. The first category is the degree of situational ambiguity in the negotiation setting. When the bargaining context has clear norms regarding the rules of fairness (e.g., economic values or other norms) or how the parties should interact, gender differences appear to decline (Walters et al., 1998). Reducing the degree of situational ambiguity constrains the influence of gender on negotiation (Bowles et al., 2005). In contrast, when the parties have little guidance to judge what is a good or appropriate outcome (weaker situational cues), there is greater potential for gender differences (Walters et al., 1998). The other category of situational factors is called “gender triggers.” Gender triggers precipitate divergent behavioral responses as a function of gender. An important factor within gender triggers relevant to audit negotiation in particular is whether or not the negotiator is acting as representative (Bowles et al., 2005). Role representation is relevant, particularly in an audit negotiation setting, because auditors must always act in the best interest of the “users” of the financial statements. People with interdependent self-construals focus on their obligations to others (Eagly & Wood, 1991), and women have been found to develop more interdependent self-construals than men (Brickson & Brewer, 2001; Eagly, 1987).3 Therefore, when women are in a representative role, they are highly motivated by the goals of those they are representing, in this case, the users of the financial statements. Given this motivation, they are more likely to stand firm and less likely to concede or compromise (Amanatullah & Morris, 2010; Bowles et al., 2005). Both situational ambiguity and representative roles are relevant to the audit negotiation setting. Issues that are negotiated between auditors and client management generally have considerable ambiguity. These issues have no clear-cut solution through GAAP or, if an issue involves an estimate, there is a considerable amount of estimation uncertainty regarding the potential range or future outcome (Bame-Aldred & Kida, 2007; Gibbins et al., 2001). The ambiguity inherent in audit negotiations allows for the possibility of gender triggers, specifically role representation, to influence the negotiation. Further, auditors must always consider the users of the financial statements. Their duty is to act in the public interest, and the needs of the users of financial statements is paramount. Therefore, auditor-client negotiations appear to have the situational factors that could precipitate gender differences among auditors.

2. Theory and hypothesis development 2.1. Social identity Negotiations are generally mixed-motive situations that have an inherent tension between cooperative and competitive motives (Bazerman, Mannix, & Thompson, 1988). Negotiators may be internally or externally motivated to cooperate in order to develop a “fair” settlement for both parties; however, at the same time, they are motivated to maximize their own outcome. As a result, negotiators' motivational orientation is an important determinant of negotiation behavior and outcomes (Pruitt & Carnevale, 1993). Motivational orientations are the preferences that negotiators have towards the outcome for themselves and others (Messick & McLintock, 1968). Social identity theory can be used to evaluate the “why” of motivational orientation in negotiations. The underlying premise of social identity theory is that individuals categorize themselves into various social groups, such as gender, nationality, ethnicity and organizational and professional memberships, in order to define themselves in their social environment (Leboeuf, Shafir, & Bayuk, 2010; Markus & Kunda, 1986; Tajfel, 1978, 1982; Tajfel & Turner, 1985). Identities co-exist, and the salience of an identity in a particular setting depends upon the situational and subjective importance of the identity (Ashforth & Johnson, 2001; Brickson & Brewer, 2001; LeBoeuf et al., 2010; Markus & Kunda, 1986). The salience of a particular identity is presumed to fluctuate in response to situational cues (Turner, 1987), and the identities may be compatible or competing with one another (Scott, 1997; Wallace, 1995). Adoption of a particular identity affects how individuals process information and make decisions (Lembke & Wilson, 1998).

3 A self-construal is a way of viewing oneself. An interdependent self-construal focuses on the individual in the context of relationships and group memberships (Markus & Kitayama, 1991).

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situation renders an identity salient, people are thought to “self-stereotype,” adopting the traits and values of the momentarily salient identity (Akerlof & Kranton, 2000, 2002, 2005; Biernat, Vescio, & Green, 1996; Turner, 1985, 1987). Gender is one social identity thought to be relevant to audit research; another identity is related to the auditor's firm (organizational) identity4 – that is, as a professional member of their accounting firm. Firm identification is one of the important forms of employee attachment to organizations (Brown, 1969; Rotondi Jr, 1975). Firm identification is a specific form of social identification in which individuals define themselves in terms of their membership in a particular organization (Mael & Ashforth, 1992). Auditors are members of engagement teams, audit firms and professional organizations, all of which create group-member identity (King, 2002). King (2002) finds that a shared group identity among auditors in an experimental economics game countered their self-serving biases and increased their skepticism towards client management. In the audit negotiation literature, Bamber and Iyer (2007) find that auditors who identify highly with their profession are less likely to acquiesce to their client; however, those who identify highly with their client are more likely to acquiesce. Bauer (2015) finds that auditors who identify more strongly with their client agree more with a client's preferred accounting treatment. He also finds that a heightened professional identity increases professional skepticism. Defining the self in collective terms leads to the experience of collective interest as self-interest (Ashforth & Mael, 1989; Hogg & Terry, 2000; van Knippenberg, 2000). Therefore, an auditor identifying with the client is inclined to act in the interests of that client (i.e., Bamber & Iyer, 2007; Bauer, 2015; Stefaniak et al., 2012; Svanberg & Öhman, 2015). Conversely, an auditor identifying with the audit firm is inclined to act in the interests of their firm. When auditors negotiate with client management, they represent the voice of the audit firm. Audit partners are expected to act on behalf of the audit firm and protect the firm's exposure to litigation, while also trying to keep the client happy. They also must maintain their duty to the users of the financial statements. Although the audit firm will not directly observe negotiations, they may be aware of the results of the negotiations if the client is unhappy with the outcome (McCracken & Gibbins, 2008). Therefore, auditors will be concerned with firm interests; however, the degree of this concern is determined by the level of identification with the firm (Ashforth & Mael, 1989; Mael & Ashforth, 1992). We expect that as firm identification increases, gender differences will decrease, and the difference in recommended adjustments between female and male auditors will decrease. Therefore, hypothesis two is formally stated as follows:

2.3. Gender and auditors' ability to stand firm Bowles et al. (2005) demonstrate that when women act as representatives, they are highly motivated to protect their representatives' interests and to “stand firm.” They find evidence to support Cross and Madson's (1997) theory, which suggests that women will be particularly energized in negotiations in which they feel a personal sense of responsibility or obligation to represent the interests of another person or party. Bowles et al. (2005) find that female negotiators are able to obtain higher settlements than male bargainers. They also find that when situational ambiguity is high (negotiation ranges are not well known) the representative female negotiators' performance is significantly enhanced. Both of these factors, role representation and situational ambiguity, are relevant to auditor negotiations. Furthermore, Birnberg (2011, p. 6) notes that research from outside the accounting domain strongly suggests that gender differences should be studied in accounting research because “studies have reported significant gender-related differences in areas such as risk taking.” When auditors and client management have a dispute over an estimate, the disagreement is most likely related to the degree of uncertainty in management's assertions regarding future events. Studies outside of accounting find, when assessing future events, that men tend to be more optimistic than women. For instance, men are strikingly more optimistic than are women regarding future performance of key economic performance indicators and stock market performance (Jacobsen, Lee, Marquering, & Zhang, 2014). Further, there is ample evidence that women are more risk-averse than are men in a variety of contexts (see Croson & Gneezy, 2009). Breesch and Branson (2009) show that female auditors are more risk-averse and discover more potential misstatements than do male auditors. Finally, finance studies find that female investors tend to be more risk-averse than male investors (Odean, 2000; Charness & Gneezy, 2012) and female fund managers tend to be more risk-averse as well (Barber & Odean, 2001), suggesting that expertise does not diminish the effect. These differences in optimism and risk tolerance suggest that female auditors are less likely to accept client management's explanations and more likely to propose conservative estimates. A recent review of the studies of gender issues in accounting finds that few studies have examined gender differences in auditing (Khif & Achek, 2017). Research shows that female auditors are less influenced by unverified client-provided explanations (Gold, Hunton, & Gomaa, 2009) and exhibit lower intentions to engage in audit quality-reductionbehaviors (Sweeney, Arnold, & Pierce, 2010). Hardies et al. (2016, p. 8) find that female auditors are more likely to issue a going concern opinion to financially distressed firms and suggest that the “behavior of female auditors is more aligned with the quality-oriented aspect of the audit profession (i.e., serving the public interest).” Therefore, although males are generally found to negotiate more aggressive outcomes in traditional negotiation research as compared to females, the audit context is expected to precipitate gender triggers so that the reverse will be found. We expect that, compared to male auditors, female auditors will stand firm and be less likely to acquiesce to the client's preferred accounting treatment. As such, hypothesis one is formally stated as:

H2. Higher audit firm identity attenuates the larger adjustments recommended by female auditors.

3. Methodology 3.1. Participants Senior managers and partners from two Big Four firms participated in the study. Auditors at this level are regularly involved in the resolution of disputes relating to proposed audit adjustments (Gibbins et al., 2001; MacTavish, 2018; Ng & Tan, 2003). At Firm 1, three partners provided a list of 78 potential participants. The experimental package was distributed to the list of participants and 54 individuals (70%) completed the experimental materials. At Firm 2, one of the researchers attended a firm training session and distributed the experimental package to the attendees. All 50 attendees completed the

H1. Female auditors recommend larger audit adjustments than do male auditors. 2.4. Interaction of gender and audit firm identification People have various identities, and research suggests that their selfconcept is malleable and multifaceted, with different aspects surfacing at different times (Markus & Kunda, 1986; Turner, 1985). Although a person may have many social identities, identity salience is presumed to fluctuate in response to situational cues (Turner, 1987). When a

4 Organizational identity is the term most commonly used in the management literature; however, the term firm identity will be used in this paper as audit firms are generally not referred to as audit organizations.

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the pre-negotiation stage (Brown & Wright, 2008). Pre-negotiation decisions have been found to influence negotiation tactics, expectations about the client's position and the likely outcomes (Northcraft & Neale, 1987). Studying pre-negotiation decisions in the audit context is common and important as it affects negotiation strategies, preparedness, and negotiation outcomes (Bame-Aldred & Kida, 2007; BrownLiburd & Wright, 2011; Hatfield, Houston, Stefaniak, & Usrey, 2010; Johnstone, Bedard, & Biggs, 2002; MacTavish, 2018; Sanchez, Agoglia, & Hatfield, 2007; Trotman, Wright, & Wright, 2005). The CFO has given management's position on the issue and now the participants must decide the amount to recommend or “propose” to the client as an adjustment. As the participants are highly experienced, they were asked to assume the role of partner in charge of the audit engagement and to make a recommendation regarding a potential audit adjustment. Based upon the information from experts, the audit team assigned to the engagement has determined a range of potential claims and has recommended an adjustment in the middle of the range. The audit team's choice of the middle of the range is a fairly realistic depiction of auditors' current approach to handling estimates (Clor-Proell & Maines, 2014). The scenario was designed to be highly ambiguous—GAAP provides little guidance in this instance. Further, as stated in the case, given the uncertainty surrounding the range, Generally Accepted Auditing Standards (GAAS) suggest there is merit to client management's argument that no adjustment is necessary (although the concern over the future financing should cause auditors to question the CFO's motives). Therefore, the participants have to rely heavily upon their own professional judgment in order to decide on the appropriate treatment.

Table 1 Participant demographics. Panel A: Participant demographics by gender Senior Manager

Partner

All

Males N Years Audit Experience (SD) Firm Identification (SD)

24 11.33 (4.57) 28.21 (4.76)

41 23.15 (7.31) 31.10 (3.58)

65 18.78 (8.60) 30.03 (4.26)

Females N Years Audit Experience (SD) Firm Identification (SD)

12 11.17 (5.27) 28.67 (6.91)

15 21.93 (7.06) 29.87 (2.56)

27 17.15 (8.26) 29.33 (4.91)

Total N Years Audit Experience (SD) Firm Identification (SD)

36 11.28 (4.74) 28.36 (5.47)

56 22.82 (7.20) 30.77 (3.36)

92 18.30 (8.49) 29.83 (4.44)

Panel B: Participant Demographics by Firm Firm 1

Firm 2

Total

Position (n) Senior Manager Partner

11 35

25 21

36 56

Gender (n) Male Female Years Audit Experience (mean, (s.d), n)

33 13 19.78 (8.40), 46

32 14 16.83 (8.41), 46

65 27 18.30 (8.49), 92

3.3. Experimental design and measures instrument, which took approximately 30 min. Twelve participants did not complete the dependent or independent measures, and thus were eliminated from the sample, resulting in a final sample size of 92 and a combined response rate of 72%. Table 1 provides demographic information for the participants by gender and firm.5

The dependent variable used to gain insight into auditors' conciliatory behavior is the amount of recommended adjustment. The independent variables are gender and firm identification.7 A five-item scale measured auditors' firm identification. The scale is an adaptation of Mael and Ashforth's (1992) organizational identification scale, which has been validated and used in previous audit research (e.g., Bamber & Iyer, 2002; Bauer, 2015; Iyer, Bamber, & Barefield, 1997; Stefaniak et al., 2012), and has been validated and used extensively in organizational behavior research (Haslam, 2004).8 Similar to Stefaniak et al. (2012), firm identification is a measured variable and a hypothetical client situation is used to avoid significant variance on the particular accounting estimate we sought to investigate. We ask participants to assume the same role as they do in their natural setting, the in-charge of an audit engagement. Creating a hypothetical company allowed us to leverage participants' abilities to place themselves in a familiar/natural group (i.e., Abrams & Hogg, 1990; Mullen, Brown, & Smith, 1992) and control the natural field setting. Previous auditor negotiation research finds that auditor experience can have a significant effect on auditors' negotiation behavior (Bamber & Iyer, 2007; Brown & Johnstone, 2009). Brown and Johnstone (2009) find that auditors with a higher level of experience are more likely to stand firm than auditors with lower levels of experience. Similarly, Bamber and Iyer (2007) find that auditors with higher levels of

3.2. Negotiation scenario We created a negotiation scenario related to an estimate for a nonroutine warranty provision and pre-tested the instrument with 18 professional accountants.6 We selected an estimate for a non-routine warranty provision as multiple cues are involved in ascertaining whether or not it is reflected appropriately in the financial statements. In addition, given that there can be a high degree of subjectivity in management's development of a point estimate, auditors should be more open to consideration of different amounts. This implies that there may be multiple solutions and thus creates a situation for a potential negotiation between the auditor and client management. The case depicts the client company, a furnace manufacturer, having an issue with their warranty provision. The client has had a historically low warranty claim rate and has made adequate provisions; however, gas company inspections revealed a crack in one of its models, and subsequent to this discovery, a large number of claims have been made for that model. Internal and external experts have assessed the cause of the crack and can only agree that it is not a design flaw. The internal expert thought the flaw was due to poor installation whereas the external expert thought it was due to heavy usage (thus suggesting there will be continued claims in the future). Given the experts' different interpretation of the cause of the crack, the potential range of claims is quite large. The scenario places the subjects in the first phase of negotiations,

7 A type/oversight (public/private) and audit committee (AC) variable was also manipulated in the case, giving rise to three versions of the case (private with no AC, private with AC, public with AC). The variable is not statistically significant in any of the analyses and is not included in the models presented. 8 The five questions are: 1. When someone criticizes my firm, it feels like a personal insult; 2. I am very interested in what others think about my firm; 3. When I talk about my firm, I usually use “we” rather than “they”; 4. My firm's successes are my successes; 5. When someone praises my firm, it feels like a personal compliment. These are the same items used in Bamber and Iyer (2002). The word “former” (i.e. former firm) was inserted in Iyer et al. (1997). These auditing studies are based on the five item scale from Mael and Ashforth (1992), with the appropriate modification from made from “school” to “firm.”

5

Participants were asked to read and sign an informed consent statement before beginning the case and the research was approved by the University's Research Ethics Board before conducting the study. 6 Pre-testing participants recommended minor changes to wording and other elements, and their feedback resulted in minor alterations to the case. 5

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is as described previously, and EXPERIENCE is participant experience measured in years as an auditor. Table 3 presents the correlations among the dependent and independent variables for the model described in (1) above. Only EXPERIENCE and FIRM_ID are significantly correlated (p < .01). This is consistent with other research that finds identification increases as tenure increases (Ashforth & Mael, 1989). The results of the regression analysis for the full sample are presented in Table 4, Panel A. In H1, we predict that female auditors recommend larger audit adjustments than do male auditors. The coefficient on GENDER is positive and significant (p = .044, one-tailed); the positive sign indicates that the RECOMMENDED_ADJ is larger for female auditors as compared to male auditors. Thus, H1 is supported. In H2, we predict that higher firm identity attenuates the larger audit adjustments recommended by female auditors. The coefficient on GENDER*FIRM_ID captures the incremental effect of FIRM_ID on female auditors. Hypothesis 2 predicts a negative coefficient on this variable. Consistent with H2, the coefficient on GENDER*FIRM_ID is negative and significant (p = .043, one-tailed). Thus, firm identity is associated with a decrease in the recommended adjustment for female auditors. We include EXPERIENCE as a control variable in the model in order to account for the possible effects of years of experience. The variable is not significant in the full sample regression in Panel A. Given the differences by rank found in the univariate analysis presented in Table 2, Panel C, we re-run the regression in (1) above on the senior manager and partner subsamples. The results are presented in Table 4, Panels B and C, and show that our test variables are highly significant in the senior manager subsample. The coefficient on GENDER is positive and significant (p = .015, one-tailed), providing support for H1. Consistent with H2, the coefficient on GENDER*FIRM_ID is negative and significant (p = .018, one-tailed). Thus, firm identity is associated with a decrease in the recommended adjustment for female auditors at the senior manager level. Table 4, Panel C shows that all coefficients are insignificant for the partner subsample. Thus, the results for senior managers do not hold in the partner subsample. This result is consistent with theory on gender differences which suggests that the differences will disappear with increased occupational socialization (Smith & Rogers, 2000).

experience are less likely to acquiesce to the client. Some theorize that gender differences will disappear with increased occupational socialization; however, female auditors in senior positions tend to be less experienced than men (Gammie, Gammie, Matson, & Duncan, 2007).9 In order to account for the possible effects of experience, the variable is included in the model as a control variable. 4. Analysis and results 4.1. Preliminary checks and data analysis To measure firm identification (FIRM_ID), subjects were asked to provide responses to five statements on a seven-point Likert scale ranging from 1 = strongly disagree to 7 = strongly agree. A composite firm identification score was computed by summing the scores of the five items measured. The items resulted in a Cronbach's alpha of 0.84. Since it is well above the recommended amount of 0.70, the scale is considered to be very reliable (Cronbach, 1982). A t-test of FIRM_ID by audit firm was done and no significant differences between the two audit firms were found. Several checks were included to ensure that participants interpreted the case correctly. As a check on understanding the client management's motivation, participants indicated on an eleven-point scale ranging from 0 = strongly disagree to 10 = strongly agree the degree to which they thought that client management was engaging in earnings management (M = 6.40; SEM = 0.208). The mean response above the midpoint suggests that participants were aware of client management's motivation to minimize the warranty provision in order to increase the chances of obtaining the additional financing. To check whether the auditors felt client pressure to comply, participants completed an eleven-point scale ranging from 0 = extremely low pressure to 10 = extremely high pressure for the question: “To what extent was there pressure to accept the management's proposed treatment for warranty costs, that is, no adjustment and no disclosure.” The overall mean was above the midpoint (M = 6.43; SEM = 0.203), thus indicating that auditors felt significant pressure from the CFO. Finally, participants rated the case as realistic on an eleven-point scale ranging from 0 = extremely realistic to 10 = not realistic at all (mean = 3.72, SEM = 0.240). Panel A of Table 2 presents the descriptive statistics for the amount of recommended adjustment (RECOMMENDED_ADJ). Overall, the average RECOMMENDED_ADJ is $316,848. The average RECOMMENDED_ADJ is $317,426 ($316,608) for females (males). Panel B of Table 2 presents the results of a t-test by gender for RECOMMENDED_ADJ. Overall, females propose larger audit adjustments than males. Panel C of Table 2 presents the results of separate t-tests by gender for RECOMMENDED_ADJ for the senior manager and partner subsamples. For senior managers, on average, female auditors recommend an adjustment that is $41,833 greater than the adjustment proposed by male auditors. At the partner level, on average, female auditors recommend an adjustment that is $24,816 less than the adjustment proposed by male auditors. However, the univariate differences in Panels B and C are not statistically significant (p < .493, onetailed). To test hypotheses 1 and 2, we investigate the effects of GENDER and FIRM_ID using the following model:

4.2. Sensitivity analysis Since past research finds that auditors' interpretation of the materiality of the item in a dispute has an impact on the amount of adjustment proposed (Ng & Tan, 2003), the potential impact of auditors' materiality ratings of the audit team's recommended adjustment was also analyzed. Participants rated the materiality of the audit team's recommended adjustment on an 11 point scale ranging from 0 = not material at all to 10 = extremely material, and found the adjustment to be very material (mean = 7.04, SEM = 0.202). A t-test of the materiality of the audit team's recommended adjustment by GENDER was done and no significant differences between females and males were found. 5. Discussion and conclusion In this study, we draw on social identity theory to hypothesize the effect of gender and firm identification on recommended adjustments in an auditor-client negotiation setting. Social identity theory posits that individuals categorize themselves into various social groups, such as gender, nationality, ethnicity and organizational and professional memberships, in order to define themselves in their social environment (LeBoeuf et al., 2010; Markus & Kunda, 1986; Tajfel, 1978, 1982; Tajfel & Turner, 1985). These various identities can co-exist, and the salience of an identity in a particular setting depends upon the situational and subjective importance of the identity (Ashforth & Johnson, 2001;

RECOMMENDED_ADJ = β0 + β1 GENDER + β2 FIRM_ID + β3 GENDER∗FIRM_ID + β4 EXPERIENCE +ε

(1)

where GENDER is equal to 1 (0) if participant is female (male), FIRM_ID 9 Gammie et al. (2007) find that women tend not to stay in audit firms as long as men.

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Table 2 Descriptive statistics and independent comparisons of RECOMMENDED_ADJ for Female and Male Auditors. Panel A: descriptive statistics of RECOMMENDED_ADJ

Mean SD Max Min N

Females

Males

Full Sample

317,426 156,914 595,000 68,000 27

316,608 200,312 765,000 0 65

316,848 187,763 765,000 0 92

Panel B: independent t-tests of females and males RECOMMENDED_ADJ Mean difference (Males-Females)

T

Df

p-Value

−818

−0.019

90

0.493

Panel C: Independent t-tests of females and males RECOMMENDED_ADJ by position Position

Mean difference (Males – Females)

n

T

Df

p-value

Senior Manager Partner

−41,833 24,816

36 56

−0.631 0.431

34 54

0.266 0.334

Notes: RECOMMENDED_ADJ is the amount of adjustment recommended by the auditors. Reported p-values are one-tailed. Table 3 Correlation matrix: independent and dependent variables. 1. 1. 2. 3. 4.

Recommended adjustment Gender Firm identification Total years experience

0.002 (0.985) 0.077 (0.468) 0.080 (0.451)

2.

Table 4 Regression analyses of the relationship between gender, firm identification, and recommended audit adjustment.

3.

RECOMMENDED_ADJ = β0 + β1GENDER+ β2FIRM_ID + β3GENDER*FIRM_ID+ β4EXPERIENCE + ε (1) −0.072 (0.500) −0.088 (0.403)

t-Statistic

p-Value

1.73 1.48 −1.74 0.38 0.26

0.044⁎⁎ 0.143 0.043⁎⁎ 0.707 0.792

Panel B: test of RECOMMENDED_ADJ GENDER 738.786 FIRM_ID 16.891 GENDER*FIRM_ID −24.585 EXPERIENCE −0.460 Constant −188.082 N 36 R2 0.160

senior manager subsample 324.674 2.28 7.975 2.12 11.195 −2.20 6.508 −0.07 231.418 −0.81

0.015⁎⁎ 0.042⁎⁎ 0.018⁎⁎ 0.707 0.423

Panel C: test of RECOMMENDED_ADJ GENDER 127.038 FIRM_ID −1.364 GENDER*FIRM_ID −5.101 EXPERIENCE 0.981 Constant 355.889 N 56 R2 0.007

partner subsample 671.787 8.765 22.269 3.730 274.422

0.426 0.877 0.410 0.794 0.201

Variable 0.272 (0.009)

Notes: Pearson correlation coefficients; p-values are in parentheses. N = 92.

Estimated coefficient

Panel A: Test of RECOMMENDED_ADJ GENDER 485.856 FIRM_ID 8.495 GENDER*FIRM_ID −16.282 EXPERIENCE 0.918 Constant 44.273 N 92 R2 0.043

Brickson & Brewer, 2001; LeBoeuf et al., 2010; Markus & Kunda, 1986). Auditors are frequently involved in audit negotiations (Beattie et al., 2001; Gibbins et al., 2001; McCracken & Gibbins, 2008), in which the issue and parameters around the situation are often ambiguous, with GAAP providing little guidance, especially in situations involving estimates. This setting is interesting because in auditor-client negotiations, the audit partners are negotiating on behalf of users of the financial statements. Given this motivation, they are more likely to stand firm and less likely to concede or compromise (Amanatullah & Morris, 2010; Bowles et al., 2005). We provide insight into the auditor's initial willingness to concede to the client's preferred accounting treatment in an audit negotiation setting. Although gender differences in many negotiation contexts show men as more aggressive in their opening stance, situational identity theory and the specific context of audit negotiations provide us the opportunity to view gender differences in a different light. This is consistent with literature that shows women in a representative role negotiate more aggressively than males (Bowles et al., 2005). It also provides further support to Cross and Madson's (1997) theory which suggests that women will be particularly energized in negotiations in which they feel a personal sense of responsibility or obligation to represent the interests of another person or party. In this setting, we hypothesize and find that female auditors recommend higher audit adjustments than male auditors. This is the first study to examine the interactive effects of gender and firm identification on auditors' pre-negotiation decisions. The study builds upon recent accounting research on the effects of gender in accounting (e.g., Francis et al., 2015; Hardies et al., 2016; Sweeney et al., 2010). We also extend the accounting research examining the motivational orientation, judgments and behaviors of individual accountants and auditors using social identity theory by looking at another factor

S.E. of coefficient Full Sample 280.457 5.749 9.381 2.434 167.178

0.19 −0.16 −0.23 0.26 1.30

Notes: Where RECOMMENDED_ADJ is the amount of adjustment recommended by the auditors. GENDER is equal to 1 (0) if participant is female (male), FIRM_ID is a composite firm identification score, computed by summing the scores for responses to five statements on a seven-point Likert scale ranging from 1 = strongly disagree to 7 = strongly agree, EXPERIENCE is participant experience measured in years as an auditor, and S.E. is standard error. ⁎⁎ p < .05, one-tailed.

that affects motivational orientation (e.g., Bamber & Iyer, 2002, 2007; Bauer, 2015; Iyer et al., 1997; Stefaniak et al., 2012). Defining the self in collective terms leads to experience of collective interest as self-interest (Ashforth & Mael, 1989; Hogg & Terry, 2000; van Knippenberg, 7

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provide insight into what matters to males and females. It may also provide more insight into the underlying motivational orientations of male and female auditors.

2000). Previous studies have found that an auditor identifying with the client is inclined to act in the interest of that client (i.e., Bamber & Iyer, 2007; Bauer, 2015; Stefaniak et al., 2012; Svanberg & Öhman, 2015). Relatedly, we posit and find that at higher levels of firm identification, female auditors recommend adjustments that are more aligned with the interests of their firm. In supplemental analysis, we find that our results hold in the senior manager subsample only. This result is consistent with theory on gender differences which suggests that the differences will disappear with increased occupational socialization (Smith & Rogers, 2000). Similarly, McCracken et al. (2011) find that the auditor's level (partner vs. manager) affects intentions to use different negotiation strategies. Thus, our study not only provides insight into the question “Does gender matter?”; it also sheds light on the question “When does gender matter?” These results have important implications for the audit profession and audit researchers. Since gender does matter, audit firms should consider incorporating gender issues into auditor negotiation training. Menkle-Meadow (2000) argues that while researchers will continue to debate over why and if gender matters, educators do their students a disservice if they fail to consider gender issues. Training exercises that make negotiators aware of gender issues can make them more effective negotiators. The findings also suggest that mixed-gender audit negotiation teams should be considered for their potential to bring different perspectives to the bargaining table. Each perspective can highlight the benefits of different negotiating tactics and on what goals should drive their behavior. As well, further negotiation-specific training may be warranted for those at the senior manager level to ensure that differences in adjustments are due to the nature of the specific accounting issues and not due to other factors. In addition, the findings support the relevance of social identity theory to understanding auditors' negotiation behavior (e.g., Bamber & Iyer, 2007; Bauer, 2015; Stefaniak 2012). Now that research has shown that professional identification, client identification and firm identification can affect auditor negotiations, future research into how auditors manage and enact these identities in negotiation settings can greatly enhance our understanding of how social-psychological factors motivate auditors. It can also provide insight into what situational factors make the various aspects of auditors' identity salient. The findings related to firm identification are also of particular importance to audit firms. Consistent with social identity theory, auditors who identify highly with their audit firm are loyal to the firm and put the firm's interests first. Firms need to ensure that auditors' perceptions of what the firms' values are, is indeed in line with the firms' actual values. Like all studies, this study has its strengths and limitations that need to be addressed. This study uses senior-level auditors who have considerable knowledge and experience in the context of the auditor-client negotiation scenario. Overall, the participants considered the scenario realistic, and, therefore, there was a good match between the subjects and the task. In addition, the study allows for control of certain variables that have been found to affect audit negotiations, such as experience. The case-based nature of this study focuses on the participant's initial recommendation(s) in the pre-negotiation stage and therefore fails to capture the steps and tactics that would occur in actual negotiations. Future research could investigate how these aspects of identity affect the negotiation strategies used, the final negotiated outcome, or the process when the client makes a counteroffer. Further, although the participants rated the scenario as realistic, the task was simplified, and the participants were provided with minimal information. When negotiating actual audit issues, the participants would have the ability to refer to peers, may have the ability to trade-off issues and would have more information and experience regarding the particular client. Future research might focus on the impact of consultations within the auditing firm, where the gender of the party consulted is manipulated. As well, qualitative research into how male and female auditors deal with and enact their complex social identities would

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