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

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

What?

What?

How have the Dutch audit firms’ partner profit sharing, compensation, and performance incentives systems developed over the past 10 years in relation to audit quality incentives?

Why?

Additional focal points are (equal) firm based profit sharing versus partner performance systems, profit sharing systems across service lines, audit firm sustainability over the economic cycles of each of the service lines – and how these incentive systems relate to the firms’ overall audit quality assurance systems.

FAR sponsored study published in The Accounting Review

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.
External →publications.aaahq.org
The study examines how audit firms changed their policies regarding audit partner performance measurement, career development, and compensation during a period of heightened public scrutiny of audit quality (2007–2017).
Implementing such policy changes requires a delicate transition in organizational design and internal processes and may not always translate effectively into day-to-day practices. Using proprietary performance management policies and individual partner performance and compensation data from the eight largest Dutch audit firms provides an in-depth understanding of the evolution of performance management for audit partners.
Findings indicate that most policy changes have real consequences. For example, audit quality becomes more influential in career development, while profit sharing is increasingly linked to quality and long-term performance.
Overall, audit firms appear responsive to public scrutiny, aligning partner incentives more closely with societal expectations of audit quality.
This study examines how Dutch audit firms changed their policies for audit partner performance measurement, career development, and compensation during a period of heightened public scrutiny (2007–2017), and whether those changes translated into day‑to‑day practices. Using proprietary policy documents and partner‑level performance and compensation data from the eight largest audit firms in the Netherlands, the authors find that audit quality became more consequential for promotions, demotions, and job retention, while profit sharing shifted toward longer‑term performance and was complemented by penalties (and claw‑backs) for low quality. Overall, firms appear responsive to public scrutiny, aligning partner incentives more closely with societal expectations of audit quality.
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Project info

Project Lead

Prof. dr. Jan Bouwens

Research team

Yuxia Zou
Robert Knechel
Prof. dr. Jan Bouwens
Prof. dr. Olof Bik, RA

Involved University

Theme(s)

Project Number – 2017C02-2

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