Bankruptcy-Related Opinions: The Effects of Partner Compensation Plans, Client Size, and Office Size

Posted: 27 Jun 1997

See all articles by Joseph V. Carcello

Joseph V. Carcello

University of Tennessee

Dana R. Hermanson

Kennesaw State University - Department of Accounting

H. Fenwick Huss

Georgia State University

Date Written: Undated

Abstract

This paper examines the relation of auditors' propensity to modify bankruptcy-related audit opinions (the last opinion issued before the client declares bankruptcy) with partner compensation plans, client size, and office size. Partner compensation plans in the Big Six accounting firms tend to emphasize local office profits or worldwide firm profits (hereafter "small pool" or "large pool" firms, respectively [Trompeter 1994]). In small pool firms, partners view their personal compensation to be more closely tied to client retention than do partners in large pool firms. Auditors' vulnerability to client demands in small pool firms may be greater depending on the size of the client and the size of the office. When making audit opinion decisions, auditors in small pool firms may be more likely to focus on client size since the loss of a large client can dramatically affect the compensation pool. The client size effect is likely to be even stronger in smaller offices of small pool firms. Such a small office may generate much of its revenue form a single large client. We find no overall evidence of an association between partner compensation plans and auditors' bankruptcy-related reporting decisions. However, there is some evidence of an interaction between partner compensation plans and client size. In separate analyses by compensation plan type, client size is significant in explaining auditors' reporting decisions in firms with small pool compensation plans. Larger clients are less likely than smaller clients to receive a modified audit opinion from auditors in small pool firms. This result appears to be strongest in the small offices of firms employing a small pool compensation scheme, although more research is needed before any conclusions are drawn. In large pool firms, client size is not significant in explaining bankruptcy-related audit opinions.

JEL Classification: M40, M49, L84, J33

Suggested Citation

Carcello, Joseph V. and Hermanson, Dana R. and Huss, H. Fenwick, Bankruptcy-Related Opinions: The Effects of Partner Compensation Plans, Client Size, and Office Size (Undated). Available at SSRN: https://ssrn.com/abstract=8514

Joseph V. Carcello

University of Tennessee ( email )

Department of Accounting & Information Management
629 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-1757 (Phone)
865-974-4631 (Fax)

Dana R. Hermanson

Kennesaw State University - Department of Accounting ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States
770-423-6077 (Phone)
770-499-3420 (Fax)

H. Fenwick Huss (Contact Author)

Georgia State University ( email )

P.O. Box 4050
Atlanta, GA 30302-4050
United States
404-651-4487 (Phone)
404-651-1033 (Fax)

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