Management Accounting Section Midyear Meeting

Incentivizing Audit Partners Using Performance Measures

• In Event: Performance Measurement IV

Abstract

In this paper, we empirically examine how audit firms use performance management to incentivize audit partners. We examine whether and if so how achievements gauged in performance measures are associated with audit partner’s income and prospects in the audit firm. Typically audit firms measure performance in the dimensions of client, firm, people and audit quality, or summarize these factors in comprehensive measures. Based on internal policies from the Dutch Big 6 audit firms, we find that audit partners’ profit shares are generally based on individual capital contribution, competence levels and annual performance. We observe over the period of 2007 to 2017 that firms have adapted their incentive policies. Using actual performance evaluation, compensation and career records, we hypothesize and empirically document that individual partners’ annual performance significantly explains their profit shares. We further find that audit partners who report subpar annual performance are less likely to be promoted and more likely to leave their positions in the future. This study offers insight to help both academics and practitioners to understand the working of audit partner performance management as an incentive system in audit partnerships.

Authors

• Jan Bouwens, University of Amsterdam

• Olof Bik, Nyenrode Business Universiteit

• Yuxia Zou, University of Cambridge

• W Robert Knechel, University of Florida