Audit Partners’ Economic Incentives and Discretionary Accruals

• In Event: Audit Partners and Audit Quality

Abstract

Economic incentives are fundamental for understanding auditors’ behavior and the audit partners’ ability to remain independent (Johnstone, Sutton and Warfield, 2001; Liu and Simunic, 2005; Bedard et al., 2008). We contribute to this debate by investigating audit quality effects of 1) the association between partner compensation and generated audit fees, 2) partner wealth and 3) partner debt. Using a discretionary accruals model estimated on a sample of 9,411 Belgian Big 4 audit clients from 2007-2010, we find that fee-based compensation is negatively associated with audit quality. However, the documented adverse audit quality effects are mitigated by the risk of reputation loss. While partner wealth is not significantly associated with discretionary accruals, partner’s debt pressure has a negative effect on audit quality.

Authors

• Simon Dekeyser, KU Leuven

• Ann Gaeremynck, KU Leuven

• Marleen Willekens, KU Leuven