Behind the Transparency Report: Examining the Influence of Partner Remuneration Schemes on Audit Quality

• In Event: Audit Partners

Abstract

We use disclosures from 2013 and 2014 mandatory Australian audit firm transparency reports to investigate the association between the design features of partner remuneration schemes and audit quality. Specifically, we examine the influence of four features of partner remuneration schemes: the inclusion of performance-based compensation components, whether partner remuneration is linked to internally assessed measures of audit quality, whether partner remuneration is linked to client retention and acquisition and the size of profit sharing pool. Using the issuance of going-concern opinion and discretionary accruals as audit quality proxies, we find evidence of differences in audit quality related to partner remuneration schemes. We find that the inclusion of a link between partner remuneration and internally assessed measures of audit quality is associated with higher audit quality using our external measures. We also document that the inclusion of client retention and growth and performance-based remuneration in partner remuneration schemes is associated with higher audit quality. Our findings inform regulators and the profession that partner remuneration design features are associated with differences in audit quality.

Authors

• Dale Fu, UNSW Australia

• Elizabeth Carson, University of New South Wales

• Roger Simnett, University of New South Wales