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External Rotation and Auditor-Client Negotiations: The Role of Affective Relationship Commitment and Power
Last registered on October 05, 2015

Pre-Trial

Trial Information
General Information
Title
External Rotation and Auditor-Client Negotiations: The Role of Affective Relationship Commitment and Power
RCT ID
AEARCTR-0000897
Initial registration date
October 05, 2015
Last updated
October 05, 2015 11:21 AM EDT
Location(s)
Region
Primary Investigator
Affiliation
University of Mainz
Other Primary Investigator(s)
PI Affiliation
University of Mainz
Additional Trial Information
Status
In development
Start date
2015-10-06
End date
2015-10-30
Secondary IDs
Abstract
The European Union has recently introduced an external rotation requirement to enhance auditor independence and audit quality. Prior literature argues that audit firm rotation may enhance auditor independence because it reduces economic incentives to retain the client. This study goes beyond the economic effects and considers the effects of the rotation requirement on the personal relationship between the auditor and the client. Based on the dual concern model, we argue that a weaker personal relationship between both parties due to the rotation requirement can hinder effective auditor-client negotiations. In contrast, the personal relationship that develops when the auditor is retained for several periods can enable integrative solutions. Moreover, we argue that the positive effects of a personal relationship can be realized especially when the auditor has sufficient power. To test our hypotheses, we follow an experimental economics approach. This approach enables us to disentangle financial incentives from affective commitment arising from a personal relationship.
External Link(s)
Registration Citation
Citation
Koch, Christopher and Jonas van Elten. 2015. "External Rotation and Auditor-Client Negotiations: The Role of Affective Relationship Commitment and Power." AEA RCT Registry. October 05. https://doi.org/10.1257/rct.897-2.0.
Former Citation
Koch, Christopher and Jonas van Elten. 2015. "External Rotation and Auditor-Client Negotiations: The Role of Affective Relationship Commitment and Power." AEA RCT Registry. October 05. https://www.socialscienceregistry.org/trials/897/history/5500.
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Experimental Details
Interventions
Intervention(s)
The experiment is a 2 by 2 factorial design with the independent variables rotation regime and auditor power fully crossed.

We manipulate the rotation regime through the number of periods auditors interact with clients. Investors and managers remain in the same group throughout all 15 experimental rounds. In the rotation condition, the auditor is randomly assigned to a new investor-manager pair after each round. In the retention condition, the auditor interacts with the same investor-manager pair throughout the whole experiment.

We manipulate auditor power by varying the economic disadvantages managers experience from a qualified audit report. In the high-power condition, auditor rejections reduce manager payoffs by 50%. In the low-power condition, auditor rejections reduce manager payoffs by 5%.
Intervention Start Date
2015-10-06
Intervention End Date
2015-10-30
Primary Outcomes
Primary Outcomes (end points)
The main dependent measure is the auditor's negotiation strategy. It is specified by the number of messages auditors choose from the five available strategy options presented in a negotiation catalogue: avoiding, conceding, contending, compromising, or integrative strategies.
Primary Outcomes (explanation)
Secondary Outcomes
Secondary Outcomes (end points)
Secondary Outcomes (explanation)
Experimental Design
Experimental Design
We implement an experimental economics approach with incentivized multi-period interaction among student-subjects. The experiment is designed as a modified version of the standard two-player trust game. In a trust game, investor-subjects receive an initial endowment and decide how much of their endowment to send to an anonymous responder-subject. The responder receives a multiple share of the investment and likewise decides which share to return. In the modified version, the decision of the responder is subject to approval by an independent supervising body that we refer to as gatekeeper. The gatekeeper reflects an external auditor who negotiates with the responder about the return on investment and decides on behalf of the investor whether the returned share is appropriate or not.

We capture the modified trust game in a five-stage experimental design. Before the experiment begins, student-subjects are randomly assigned to one of the three experimental roles as investor, manager, or auditor. In the first stage, investor-subjects receive an initial endowment and decide whether or not to entrust resources to the manager. Managers receive a multiple share of the investment in the second stage, and communicate their preferred distribution to the auditor. In the third stage, auditors may convince the manager to return higher shares to the investor by sending the manager text-messages. We refer to the interaction between auditors and managers as negotiation process. In the forth stage, managers receive the auditor's message and decide which share to return to the investor. Finally, in the fifth stage, auditors accept or reject the manager's return on behalf of the investors. This five-stage trust game describes one experimental round. Each subject participates in 15 experimental rounds.

Hypotheses:

H1a: Auditors apply integrative negotiation strategies less frequently when audit-firm rotation is mandated than when its not.
H1b: Auditors reject outcomes that fall short of their negotiation aim more often when audit-firm rotation is mandated than when its not.

H2a: Auditors apply contending negotiation strategies more frequently when their power position is strong than when its weak.
H2b: Auditors reject outcomes that fall short of their negotiation aim more often when their power position is strong than when its weak.

H3a: Auditors apply integrative negotiation strategies most often when their power position is strong and when audit-firm rotation is not mandated.
H3b: Auditors reject outcomes that fall short of their negotiation aim most often when their power position is strong and when audit-firm rotation is not mandated.

We conduct the experiment in the Experimental Economics Laboratory at the University of Mannheim (mLab) and the Frankfurt Laboratory for Experimental Economics at the Goethe University of Frankfurt (FLEX). The experiment is programmed and conducted with the software z-Tree and subjects are recruited from the general student population using ORSEE.
Experimental Design Details
Randomization Method
Randomization is done by the experimental software z-Tree.
Randomization Unit
Student-subjects are randomly seated, randomly assigned to their experimental role, and randomly divided into groups of three players.
Was the treatment clustered?
No
Experiment Characteristics
Sample size: planned number of clusters
A total of 240 student-subjects participate in the experiment.
Sample size: planned number of observations
80 auditor-subjects participate in 15 experimental rounds each.
Sample size (or number of clusters) by treatment arms
The experiment is a fully crossed 2*2 factorial design. 60 student-subjects participate in each of the four experimental conditions.
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
Supporting Documents and Materials

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IRB
INSTITUTIONAL REVIEW BOARDS (IRBs)
IRB Name
Ethik-Kommission des FB-03 ReWi der Universitaet Mainz
IRB Approval Date
2015-09-16
IRB Approval Number
n/a
Post-Trial
Post Trial Information
Study Withdrawal
Intervention
Is the intervention completed?
No
Is data collection complete?
Data Publication
Data Publication
Is public data available?
No
Program Files
Program Files
Reports and Papers
Preliminary Reports
Relevant Papers