Soon-Yeow Phang

Auditor-client negotiations over contentious accounting issues can shape reported financial outcomes, yet little is known about how communication dynamics between audit committee (AC) members and auditors influence client negotiation behavior. We conduct an experiment in which experienced financial executives, assuming the role of chief financial officer, negotiate a disputed inventory obsolescence allowance with a simulated audit partner in the presence of an AC member; the AC member’s distributive communication style (offensive vs. defensive) and the audit partner’s reflective empathy (high vs. low) are manipulated between participants. Drawing on relational framing theory in interpersonal communication, we predict and find that a distributive-offensive AC communication style leads clients to establish their reporting positions and concede less to the auditor’s proposed adjustment, unless it is accompanied by high reflective empathy from the audit partner, which neutralizes this resistance. This pattern emerges in the client’s initial negotiation position and persists through the final negotiated allowance. Our findings suggest that auditors can use empathetic communication as a strategic tool to defuse the competitive posture that an assertive governance signal may provoke. Overall, our results provide insights into how AC members’ and auditors’ communication styles jointly shape client negotiation behavior, highlighting the importance of communication strategies in achieving effective audit negotiation outcomes.

Managers can choose whether to voluntarily disclose a pending investigation by the U.S. Securities and Exchange Commission (SEC) to their stakeholders. We examine whether and how investors’ reaction to the management disclosure of an SEC investigation before and after a penalty outcome across two experiments are influenced by the level of management’s acceptance of responsibility and different communication modes. We predict and find that investors are more willing to invest when companies voluntarily disclose an ongoing SEC investigation and even more so when management’s public acceptance of responsibility for the punitive outcome is higher. We further predict and find that investors are more willing to invest when they are informed about the voluntary SEC investigation and when the company’s subsequent reporting of the penalty is done through the annual report rather than on social media. However, in the absence of a voluntary disclosure beforehand, investors react more positively to the reporting of the investigation’s outcome when it is done through social media as opposed to the annual report.

The implementation of enhanced auditor reporting requirements has changed how the audit report conveys information about the appropriateness of the reporting entity's use of the going concern assumption. In response to audit practitioners' concerns about how financial statement users respond to going concern matters reported as a Material Uncertainty Related to Going Concern (MURGC) or a Key Audit Matter (KAM), we conduct an experiment examining the joint effects of the auditor's going concern disclosure format and management's causal attribution for the issue. We find that investors assess the likelihood of remaining a going concern most favourably when management attributes the cause to an internal, more controllable factor and the matter is disclosed as a KAM.

While auditors understand the benefits of data analytics (DA) for audit quality, many fail to utilize it to its full potential. Based on the insights gained from our interviews, we conduct an experiment to investigate the joint influence of auditor motives and persuasive messages in enhancing auditors’ reliance on DA. We find that auditors motivated by enjoyment and pleasure (hedonic motives) are more likely to rely on DA when they receive persuasive messages containing less forceful language. In contrast, auditors who aim for personal excellence and purpose (eudaimonic motives) are more likely to rely on DA when they receive persuasive messages containing forceful language. Our study suggests how audit firms could structure messages to auditors about using DA to prime their motives for relying on it.

SUMMARY: We conduct two experiments to examine how reward incentives and auditors’ motivation traits interact to influence skepticism when auditing complex estimates. In Experiment 1, we predict and find that rewarding auditors increases skepticism, but only for extrinsically motivated auditors. In contrast, auditors with higher intrinsic motivation are not influenced by rewards. In Experiment 2, we predict and find that rewarding auditors with tangible rather than intangible rewards increases skepticism, but only for extrinsically motivated auditors. For auditors with higher intrinsic motivation, the type of reward does not significantly affect their level of skepticism. Our findings underscore the importance of considering auditors’ motivation traits when evaluating the effectiveness of reward incentives designed to promote skepticism.

Disclosures of audit firm tenure have been mandated in some countries and are being considered in others. We investigate whether and how the form of firm tenure disclosures and the inclusion of partner tenure combine to affect investor judgements. We find that investors perceive the auditor as more independent and their investment as more attractive when firm tenure is disclosed in brief rather than detailed form, and this effect is stronger when partner tenure is disclosed along with firm tenure than when it is not. A mediation analysis shows that perceived auditor independence explains the joint effect of firm tenure disclosure form and partner tenure disclosures on the investment judgement. Audit regulators should consider our findings when assessing whether and how auditor tenure disclosures should be mandated and whether it is beneficial to standardize disclosures.

When evaluating the potential financial effects of climate change, investors demand disclosures of the climate‐related risks and opportunities that companies need to manage. We examine how and why management control over climate change performance affects investors' evaluations of such disclosures. In a series of experiments, we find that investors believe that managerial optimism is beneficial and, thus, are more willing to invest when climate‐related disclosures focus on opportunities rather than risks. This effect, however, occurs only when management has high control over the company's future climate change performance. When that control is low, investors believe that managerial realism is beneficial and, thus, are more willing to invest when these disclosures focus on risks rather than opportunities. Our study has implications for companies and standard setters considering the consequences of focusing on either risks or opportunities in climate change reporting and the conditions under which one focus or the other may be beneficial.

When evaluating the potential financial effects of climate change, investors demand disclosures of the climate-related risks and opportunities that companies need to manage. We examine how and why management control over climate change performance affects investors' evaluations of such disclosures. In a series of experiments, we find that investors believe that managerial optimism is beneficial and, thus, are more willing to invest when climate-related disclosures focus on opportunities rather than risks. This effect, however, occurs only when management has high control over the company's future climate change performance. When that control is low, investors believe that managerial realism is beneficial and, thus, are more willing to invest when these disclosures focus on risks rather than opportunities. Our study has implications for companies and standard setters considering the consequences of focusing on either risks or opportunities in climate change reporting and the conditions under which one focus or the other may be beneficial.