2017C02-2 – Profit sharing, compensation, performance and audit quality incentives

A FAR sponsored study by Olof Bik, Jan Bouwens, Robert Knechel and Yuxia Zou has been accepted for publication in The Accounting Review. This study examines how audit firms changed their policies on audit partner performance measurement, career development, and compensation during a period of heightened public scrutiny of audit quality (2007–2017). It argues that implementing policy changes requires a delicate transition in organizational design and internal processes of firms and that the changes may not automatically translate into day-to-day practices. Access to proprietary performance management policies and individual partner performance and compensation data from the eight largest Dutch audit firms enables an in-depth analysis of the evolution of audit partner performance management. The findings indicate that most policy changes have tangible consequences. In particular, audit quality becomes more influential in career development decisions, while profit sharing is increasingly linked to quality and long-term performance. Overall, the evidence suggests that audit firms respond effectively to public scrutiny by increasingly aligning partner incentives with societal expectations regarding audit quality.