order to control for potentially confounding effects, including participants appearance, gender, mannerisms, and prior acquaintance (i.e., whether paired participants know one another). At period end, auditor-client dyads are randomly reassigned. Participants do not receive feedback on realized asset values throughout the experiment. We suppress feedback in order to reinforce the fact that each period represents an independent, one-shot negotiation. Furthermore, feedback on asset value is lagged in naturally-occurring settings. Our experimental context is purposefully stark, which circumvents possible confounds associated with participants’ beliefs about how they are supposed to behave in auditor-client settings. We are interested in how auditor-client dyads determine a reported amount, abstracting away from other potentially noisy factors (see also Wang and Tuttle 2009; Wang 2010). At the beginning of each period, neither player knows the actual asset value. We make this choice to control participants’ bargaining power, such that one player does not have an advantage over the other (discussed below). The players negotiate over an acceptable reported asset value, which impacts their payoffs. The actual asset value is determined by drawing from a uniform distribution that ranges from 50 to 1,000 in increments of 50. So the asset takes one of 20 values, each having a 5 percent chance of realization. The actual asset value is randomly generated for each auditor-client dyad per period. The instructions include a chart that lists potential values, the probability of occurrence, and the probability that the amount exceeds the actual asset value (see also Wang and Tuttle 2009; Wang 2010). The chart is reproduced in Table 1. [Insert 1 about here.] Negotiations take place as follows. The client begins by proposing a reported amount. The reported amount is communicated to the auditor, who either accepts or makes a counteroffer.
several audit partners in China who confirmed that the CFO typically is involved in negotiations. We include numerous control variables in our analysis on prior research (e.g., Ashton et al. 1989; Ettredge et al. 2006; Whitworth and Lambert 2014). We expect auditor and client characteristics to impact the negotiation process and, in turn, audit delay. The variables are defined in Table 5 and summarized below. For the auditor, we include an indicator variable for Big 4 auditor (BIG). For client characteristics, we include the natural log of total assets (SIZE), growth in revenues (GROWTHR), the leverage ratio (LEV), the quick ratio (QUICK), inventory and receivables divided by total assets (INVREC), negative earnings (LOSS), foreign operations (FOREIGN), the natural log of firm age (FIRMAGE), the percentage of independent board directors (BOARDIND), the number of board meetings (BOARDMEET), and the percentage of shares held by the top ten shareholders (TOPSH). In addition, we control for year (YearIndicators) and industry (IndustryIndicators) fixed effects, and we adjust standard errors for clustering at the firm level. All continuous variables also are winsorized at the top and bottom one percent to avoid the impact of outliers. [Insert 5 about here.] Table 6 reports descriptive statistics for audit delay (LnLag and SLag), auditor and client narcissism (SIZEAUD1, SIZEAUD2, and SIZECFO), and other control variables. We observe that audit delay is, on average, 91.4 days. Inspection of Table 6 indicates that SIZEAUD1 is larger than SIZEAUD2, suggesting that the review auditor’s narcissism exceeds that of the engagement auditor. Moreover, SIZEAUD1 and SIZEAUD2 are larger than SIZECFO. This difference, however, is unlikely to be related to narcissism because, in general, more space is allotted for signatures in the auditor’s report than in the annual report. client
The figure depicts participants’ payoffs in our experiment, contingent on negotiated outcomes. Table 1 Relation between Potential and Actual Asset Value Value Probability of being the actual value Probability of being higher than the actual value 1000 5% 95% 950 5% 90% 900 5% 85% 850 5% 80% 800 5% 75% 750 5% 70% 700 5% 65% 650 5% 60% 600 5% 55% 550 5% 50% 500 5% 45% 450 5% 40% 400 5% 35% 350 5% 30% 300 5% 25% 250 5% 20% 200 5% 15% 150 5% 10% 100 5% 5% 50 5% 0% Notes: In our experiment, the client chooses a reported amount. The first column includes potential amounts that can be reported. The second column indicates that the probability that each potential amount corresponds with the actual asset value is 5 percent. The third column shows the probability that the reported amount is greater than the actual asset value. 2 Descriptive Statistics Auditor Narcissism Client Narcissism Low High