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This paper examines the relationship between audit partner compensation and audit quality. Despite its alleged importance, there is scant evidence on this relationship. As financial incentives are widely used to influence behavior, they might affect audit quality. Therefore the investigation of audit partner compensation schemes is useful. We proxy audit quality as the likelihood that an auditor issues a going-concern opinion (GCO), conditional on the client’s ﬁnancial situation. Using a sample of 29,336 ﬁnancially distressed, private Belgian companies for the period 2008–2011, our results show that compensation schemes based on full equal sharing significantly reduce audit quality while increasing within-audit firm variability in audit quality. Further, both professional and commercial performance based compensation schemes positively influence audit quality. However, after a tipping point commercial incentives create selective pressure on audit partners to focus on increasing revenues at the expense of audit quality. Both performance based compensation schemes decrease within-audit firm variability in audit quality. Our findings are important for regulators, professional bodies and audit firms evaluating financial incentives and their implication for audit quality. The results are also relevant for researchers and other professionals in the services sector such as those operating in law, consulting and medicine.
|Status||Unpublished - 2016|
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- 2 Talk or presentation at a conference