Developing a Model of Factors Affecting Interactional Dysfunctions between Independent Auditors and Financial Managers and Their Impact on the Relationship between Negotiation Styles and Managers’ Likelihood of Fraudulent Financial Reporting

Elahe  Zeraati Noghabi; Karim Nakhaei; Habibolah  Nakhaei; Mohammadreza  Gholamzadeh

Authors

Elahe Zeraati Noghabi Department of Accounting, Bi.C., Islamic Azad University, Birjand, Iran Author https://orcid.org/0009-0006-0477-5542
Karim Nakhaei Department of Accounting, Bi.C., Islamic Azad University, Birjand, Iran https://orcid.org/0009-0001-2675-3778
Habibolah Nakhaei Department of Accounting, Bi.C., Islamic Azad University, Birjand, Iran Author https://orcid.org/0009-0009-9268-0624
Mohammadreza Gholamzadeh Department of Accounting, Bi.C., Islamic Azad University, Birjand, Iran Author https://orcid.org/0009-0005-0896-0852

Keywords:

Independent Auditors, Financial Managers, Interactional Dysfunctions, Negotiation Styles, Fraudulent Financial Reporting, Grounded Theory, Structural Equation Modeling

Abstract

This study aimed to develop a model of factors affecting interactional dysfunctions between independent auditors and financial managers and to examine their role in the relationship between negotiation styles and managers’ likelihood of fraudulent financial reporting. This study employed a sequential exploratory mixed-methods design. The qualitative phase used systematic grounded theory based on the Strauss and Corbin approach. Participants were selected through purposive and theoretical sampling until theoretical saturation was reached, yielding 35 experts, including 21 certified public accountants and 14 financial managers. Semi-structured in-depth interviews were analyzed through open, axial, and selective coding. The resulting framework was subsequently operationalized in a researcher-developed questionnaire. In the quantitative phase, 338 certified auditors and financial managers were selected from a population of 2,819 individuals using probability sampling and Cochran’s formula. Data were analyzed using SPSS and SmartPLS, with reliability and construct validity assessed before examining correlations and structural relationships. Significant relationships were observed between interactional dysfunctions and all identified groups of conditions. Among causal conditions, related-party transactions showed the strongest positive association with interactional dysfunctions (r=.851), whereas information transparency was negatively associated with them (r=−.543). Among contextual conditions, appropriate organizational structure demonstrated the strongest inverse relationship with interactional dysfunctions (r=−.850), followed by adequacy of disclosure (r=−.564), while information risk was positively related (r=.390). Among intervening conditions, managerial expectations had the strongest positive relationship with interactional dysfunctions (r=.783), whereas management trust-building (r=−.488), information-processing ability (r=−.433), monitoring mechanisms (r=−.348), and auditor personality characteristics (r=−.257) were negatively associated with dysfunctions. Measurement-model indices also supported adequate reliability and validity of the constructs. Interactional dysfunctions between independent auditors and financial managers arise from interconnected informational, organizational, professional, and environmental conditions and represent an important mechanism through which negotiation processes may affect the likelihood of fraudulent financial reporting; strengthening transparency, governance, professional capabilities, monitoring, and trust-based communication may therefore reduce dysfunctional interactions and enhance financial-reporting integrity.

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