Project Number – 2017C02

2017C02 – The (future) auditing (partner) business model

What?

Research synthesis, within six months.

Why?

The first JWG Research Summit (4 October 2017) resulted in the following research agenda:

2017C02-1: Research synthesis. What do we already know from research about the impact of a combination of audit and non-audit services (1) within one firm and (2) for one client on audit quality in general and on the specific audit engagement? Additional focal points are knowledge spillovers, audit firm quality culture and multidisciplinary talent pool (e.g., attracting within firm expertise for audit purposes), the trade-off between independence and the auditor’s knowledge base, and different auditee market segments (e.g., public interest entities versus owner-managed-businesses).
2017C02-2: An archival study with the nine FAR affiliated audit firms. 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? 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.
2017C02-3: An archival study with the nine FAR affiliated audit firms via a call for projects. How have the Dutch audit firms’ organizational structures and corporate governance systems developed over the past 10 years as part of the firms’ audit quality assurance systems? Focal points include the profession’s (historical) establishment, the development from partnerships to corporate models, and the role of the international firm networks in the quality assurance systems of the Dutch audit firms and audit quality for multinational group audits.
2017C02-4: Empirical research project. How do audited companies (and their supervisory boards / audit committees / shareholders) select and appoint their auditors? What are primary selection criteria in design and practice (i.e., what are actual selection and appointment decisions made)? How are the (total) costs of auditing (thus including potential switching costs) considered in selection and appointment? FAR will need to get access to audited companies’ selection process, potentially in cooperation with VEUO (the representative organization of listed companies at Euronext Amsterdam).
2017C02-5: Empirical research project. What is the impact of (increased) audit committee involvement with the audit on audit quality? Additional focal points are a (post-implementation) comparison of AC involvement and audit quality and AC involvement in key audit matter reporting and issue-clearance (including related fee-issues).
2017C02-6: A field experiment, for example within the municipalities’ market segment. What is the effect on audit quality and auditor independence of auditor selection and appointment through a government organized agency (“government organized auditing”) compared to the current appointment system in the Netherlands? Additional focal point may be the statutory required audit versus voluntary auditing.

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Performance Measurement, Career Development, and Compensation for Audit Partners

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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The evolution of performance measurement, career development, and compensation for audit partners in the context of public scrutiny

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.

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Ten considerations for conducting Root Cause Analysis in auditing

Root cause analysis (RCA) is increasingly used in auditing as part of quality assurance systems to improve audit quality. This practice note outlines ten key considerations for applying RCA effectively in audit firms.

RCA is not about assigning blame but fostering organizational learning and continuous improvement. It emphasizes understanding human behavior, recognizing that errors and successes often share similar causes, and acknowledging the complexity of organizational contexts where multiple factors contribute to outcomes.

Effective RCA requires rigorous, evidence-based approaches, practical and measurable recommendations, and collaborative processes involving skilled professionals. Challenges include interviewing staff in high-accountability environments, managing interpersonal dynamics, and ensuring recommendations go beyond superficial fixes like training.

The note also highlights the value of analyzing near misses and positive quality events, and advocates for thematic and firm-level analyses for deeper insights. Ultimately, RCA can help audit firms align practices with societal expectations of audit quality when implemented thoughtfully and systematically.

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Crossing the Divide – Behavioral Research in Auditing

Abridged version given in acceptance of the Professorship of Behavioral Research in Auditing at Nyenrode Business Universiteit This inaugural address explores three key “crossings” shaping the future of auditing:

From auditing to culture and behavior: Audit quality is not only about technical compliance but also about auditors’ professional judgment, decision-making, and the cultural context within audit firms. A quality-oriented culture and behavioral governance are essential to restoring trust and improving audit outcomes.
From practice to science: The profession needs stronger collaboration between academia and practice. The Foundation for Auditing Research (FAR) exemplifies this by enabling empirical research through unique access to audit firm data, aiming to evidence-inform public policy and professional development.
Behavioral research in auditing: This field studies how auditors’ behavior, shaped by personal, task, and environmental factors, affects audit quality. Research focuses on cultural antecedents, leadership, team dynamics, and root cause analysis, using multi-method approaches to develop practical interventions that fit audit firm identity and mitigate judgmental risks.

The address concludes with a call for multidisciplinary research, tested improvement measures, and better knowledge transfer to policymakers and practitioners. It emphasizes that behavioral insights are crucial for safeguarding audit quality in a profession where human judgment remains central.

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The Future of Assurance in Capital Markets

Efficient capital markets rely on a continuous supply of reliable and timely information and auditors are critical to this process. The economic value of an audit derives from making information more reliable to users (i.e., to reduce the risk of erroneous or manipulated information influencing the judgments of market participants). Traditionally, the focus of auditing has been on annual financial reports; however, given the speed of information creation and dissemination, the role of auditors may need to adapt or expand in the future. There are three areas where auditors might help improve information quality: (1) non-GAAP earnings, (2) ESG reporting, and (3) cybersecurity risks disclosures. To provide assurance over these types of information, audit firms need to identify the appropriate subject matter for assurance, obtain the expertise to provide assurance, develop a verification process for providing assurance, and commit to a system of organizational support for the assurance process. Multidisciplinary practices have the potential to provide expanded assurance over more information, as well as assurance related to the processes that generate the information. However, success is not inevitable, and market, social, and regulatory forces will have much to say about the emergence of new assurance initiatives. https://publications.aaahq.org/accounting-horizons/article-abstract/35/1/133/2465/The-Future-of-Assurance-in-Capital-Markets

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