Professional and Commercial Incentives in Audit Firms: Evidence on Partner Compensation
European Accounting Review, Forthcoming
58 Pages Posted: 30 Jun 2019
Date Written: June 28, 2019
Audit firms can shape and foster the desired behavior of their partners in accordance with the firm’s strategy and objectives through compensation schemes. Understanding financial incentives is therefore of great importance, especially to ensure that auditors actually deliver high quality work. This study analyzes the elements associated with the compensation of audit partners in Belgium, and specifically contributes to the literature by investigating how compensation schemes vary across firms of different sizes (Big 4, second-tier, and small audit firms). Our results indicate that the mixture of equal sharing and performance based compensation elements varies across firms of different sizes. Partner compensation in larger (Big 4 and second-tier) firms is more heavily based on performance based elements than in smaller audit firms. Furthermore, in firms of all sizes compensation appears to be strongly associated with commercially oriented elements while professionally oriented elements only play a minor role. Professionally oriented elements are, however, slightly more important in larger (Big 4 and second-tier) firms than in smaller firms.
Keywords: Partner Compensation, Financial Incentives, Equal Sharing, Performance Based
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