The relationship between auditor and client is a critical part of the accounting process. Both parties must agree on the scope of work to be done, as well as the responsibilities of each party. This agreement is typically documented in an engagement letter. An engagement letter is a contractual agreement that defines a business relationship, limits the responsibilities of the audit firm and sets expectations on both sides of the table.
Previous research has shown that management and auditors negotiate in distinct ways. For example, studies have found that managers are more likely to use tactical negotiation strategies such as bid high/concede later and trade-off one issue for another than auditors (Smith & Nichols, 1982; DeFond & Jiambalvo, 1993). However, these studies do not directly compare the negotiation decisions of both parties when faced with the same negotiation context.
In other words, if the engagement letter specifies that the auditor must obtain sufficient appropriate audit evidence and maintain professional skepticism and independence, the auditor should be less willing to acquiesce to client requests. This may be due to the fact that acquiescence can lead to the loss of a client before recuperating the costs invested in start-up, or it could be because the auditor wants to please the customer in order to retain their business (DeAngelo 1981).
On the other hand, some studies show that clients prefer trusting and long-term relationships with their auditors and want to be cooperative with them. This is a challenging balance to strike between the need to be independent and the desire to build great client service. agreement between auditor and client