Profit Sharing and Performance Incentives in Auditing Partnerships

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 12: Job-Specific Auditing Issues

Abstract

This study investigates the structure of profit-sharing schemes within accounting partnerships, answering the calls for research into the actual compensation policies of auditing firms (Liu and Simunic, 2005; IOSCO, 2009; Francis, 2011). Interviews with partners from all Big-4 firms and four mid-tier firms, as well as one ex-Arthur Andersen partner were conducted in Australia. These interviews were to gain insights into details about the profit sharing schemes and performance incentives. The evidence indicates a trend for firms to adopt larger profit pools in order to encourage the sharing of resources and greater collaboration between partners across geographical locations. We find that most firms are implementing performance-based methods to distribute profits between partners – only one mid-tier firm still uses the traditional lock-step model to share profits. The range of partner salaries within firms has increased significantly in the last 20 years. We find that associated with these changes firms have established sophisticated commercial performance-measurement systems in an attempt to accurately measure the contributions of individual partners. From our sample of mid-tier firms we find there seems to be trend towards similar profit sharing and performance incentives as currently exist within the Big-4 – suggesting they are also moving towards a more commercial business model. This study enhances our understanding of how profit-sharing schemes function within accounting partnerships and consequently how these schemes might affect incentives and behavior.

Author

• Paul J Coram, The University of Melbourne