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  • The Auditing Section
    Accounting Firm Culture and Governance: A Research Synthesis
    research summary posted May 7, 2012 by The Auditing Section, tagged 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction, 11.12 Impact of National Office on Auditor Decisions, 11.13 Partner incentive schemes 
    Title:
    Accounting Firm Culture and Governance: A Research Synthesis
    Practical Implications:

    The article provides a broad summary of prior audit firm culture and governance research with an additional focus on areas for future research.  This literature review is important for accounting firms considering or expanding quality-oriented tone at the top initiatives.  In addition, this review of accounting firm governance structures includes methods for accounting firms to mold, mentor, manage, train and reward employees to improve firm performance and audit quality. 

    Citation:

    Jenkins, J.G., D.R. Deis, J.C. Bedard, and M.B. Curtis. 2008. Accounting Firm Culture and Governance: A Research Synthesis Behavioral Research in Accounting 20 (1): 45-74.

    Keywords:
    organizational culture, governance, ethics, audit firm management, audit firm quality control, culture assessment
    Purpose of the Study:

    This paper summarizes the academic literature related to accounting firm culture and governance.  The authors motivate the study as a response to the PCAOB’s intent to revise the standards on accounting firm quality control.  The authors argue that recent audit failures demonstrate the potential consequences of the cultural tension in audit firms between revenue generation and quality service.  Regulators stress that the “tone at the top” can establish the role of the audit as for the public good rather than as a mere commodity by encouraging objectivity, independence, professional skepticism and accountability to the public.  This paper addresses the concern that greed can change accounting firm’s emphasis on delivering professional services to an emphasis on profitability.  The authors addressed the following topics: 

    • the role of audit firm culture and how it impacts audit quality.
    • various governance and control mechanisms within accounting firms, including consultation policies, ethics training, and independent monitoring boards.  

    This paper is based on a literature synthesis prepared by the auditing section of the American Accounting Association (AAA) for the Public Company Accounting Oversight Board (PCAOB).

    Design/Method/ Approach:

    The authors presented a research overview of several topics based on a review of recent accounting literature.  The results of the review were summarized in topical areas relating to culture and governance.  The authors also presented a research agenda for each topical area in which they suggested a variety of research issues to stimulate future research.  Topical areas include: The Roles of Culture, Conflicts between Organizational and Individual Goals, The Roles of Subcultures within Organizations, Social Influence, Mentoring, Communicating Culture to the Outside, Measuring Culture, Control Mechanisms within Firms, Policies Related to Consultation, Ethics Training, Independent Monitoring Boards.

    Findings:
    • Firm employees undergo a socialization process in which they are molded to the organizational culture (the firm’s set of beliefs and values).  Regulators encourage firms to use this acculturation process to stress the importance of high quality audits and taking difficult stands on issues involving earnings management, fraud or illegal acts, or contentious accounting issues.  The authors offer suggestions for future research to improve understanding in this area.
    • Subcultures may develop in firms based on functional areas (tax, audit, and consulting), individual offices in large firms (particularly foreign firm offices or firms acquired in a merger), or the influence of non-accounting professionals.  Cultural complexities may arise from power imbalances or from national political, public policy and legislative differences.
    • Social influence pressures and power from accounting firm superiors manifest in areas such as engagement time budgets and performance reviews.  Using their power, superiors positively or negatively affect the work efforts of subordinate auditors.  Firm culture can moderate or exacerbate the influence of social influence pressure and power and affect audit quality, client relationships, and employee retention.
    • The goal of accounting firm governance is to achieve goal congruence among the individuals and the organization and to foster consistency and firm-wide policies through authority structures, rules, procedures, and incentive systems.  Research suggests that partner compensation schemes should be based on more than revenue generation alone.  Partners should be focused on limiting firm risks through using a larger pool of revenue for partner compensation schemes, focusing on technical expertise among audit teams, and recognizing the importance of audit quality in the face of budgetary pressures. 
    • Ethics training may direct and alter employee behavior.  However, firms appear to rely primarily on colleges to educate their members.  Since the effects of ethics training may deteriorate over time, firms should consider supplementing this exposure with periodic reinforcement.    

    The authors suggest that their literature review reveals that accounting firm governance is a largely unexplored research topic and that accounting firms have unique ownership structures and operating characteristics in comparison to other large organizations.   

    Category:
    Audit Quality & Quality Control
    Sub-category:
    Management/Staff Interaction, Impact of National Office on Auditor Decisions, Partner incentive schemes
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  • Jennifer M Mueller-Phillips
    Professionalism and Performance Incentives in Accounting...
    research summary posted July 24, 2017 by Jennifer M Mueller-Phillips, tagged 11.13 Partner incentive schemes 
    Title:
    Professionalism and Performance Incentives in Accounting Firms
    Practical Implications:

    The authors of the study state that it will be vital for accounting firms to ensure that partner incentive schemes align incentives with values of the accounting profession.  This issue gains greater importance as mid-tier firms adopt such performance-based profit sharing models in their attempts to stay competitive with Big 4 firms because the new incentives they face represent a risk to their culture and values.  Although the current models appear to measure and weigh both commercial success and professional values, these models represent a significant change from the past when mid-tier firms used lock-step approaches that incentivized partners to follow professional values.  These findings are of interest to accounting firms and regulators as they consider the impact of partner incentive schemes on audit quality.

    Citation:

    Coram, P. J., and M. J. Robinson. 2017. Professionalism and Performance Incentives in Accounting Firms. Accounting Horizons 30 (4): 103-123.

    Keywords:
    accounting firms; profit sharing; performance incentives
    Purpose of the Study:

    In recent years, accounting regulators across the globe (United States, European Union, and United Kingdom) have pushed for greater transparency from accounting firms.  In the required “Transparency Reports,” firms conceptually discuss partner compensation.  This study examines the actual profit-sharing frameworks in place at accounting firms of various sizes in order to understand partner remuneration in the Big 4 and mid-tier accounting firms in Australia.  Particularly, this study addresses the relationship of firm performance to partner remuneration and the commercialism/professionalism trade-off inherent in accounting firms.  This study aims to increase our understanding of the two-decade change in how accounting firms design their partner remuneration framework.  While traditional profit-sharing schemes consisted of equal shares of profit made to partners, accounting firms are currently utilizing partner performance information in determining profit splits.  This trend has given rise to criticism that suggests accounting firms are becoming too commercial—perhaps failing to accomplish their mission in the public’s best interest.

    Design/Method/ Approach:

    The study interviews nine partners of Big 4 and mid-tier firms in Australia.  The mean time spent as a partner was 17.6 years—ranging from 5 years of experience to 27 years.  Six partners interviewed had audit experience or were practicing auditors; the remaining three served in “Financial Advisory” or “Private Clients” capacities.  Each interview occupied one hour, took place at the respective firm of the interviewee across eight firms, in a one-month period in 2012.  Due care was exercised for interviewers to not express opinions that may bias responses given by partners.    

    Findings:
    • Each Big 4 firm has adopted the means to set individual performance expectations and reward performance that exceeds expectations. 
    • Mid-tier firms have, also, adopted elements of performance-based methods to calculate partner profit shares.  However, mid-tier firms continue to embody traditional, lock-step approaches.   
    • A few partners expressed concerns regarding performance-based remuneration—particularly due to firm’s inadequate ability to track each partner’s contributions.
    • When compared to previous literature (2013 and 1998) regarding partner remuneration, results from this study showed an increase in the variation of partner compensation.  The increase corresponds to the stronger influence performance plays in partner compensation.
    • All Big 4 firms utilize the same types of measures to evaluate partner performance.  Partner reviews consist of two steps: ranking (no profit units distributed) and scrutinizing.
    • Big 4 firms appear to be using a balanced scorecard approach, and mid-tier firms have adopted the balanced scorecard to evaluate partner performance.  This model captures partners’ financial and nonfinancial contributions to the firm.
    • Accounting firms are increasingly aware of the “erosion” of professionalism for commercialism.  Firms are counteracting the erosion by introducing metrics on values, quality, and staff development.  However, the study illustrates that performance measures are not equally weighted.  Often, weighting is dependent on the firm’s goals, current economic climate, and partner’s role in the firm.
    • Mid-tier firms—aspiring to grow—are reengineering their remuneration frameworks to take on performance-based elements, with hopes of attracting new talent. 
    • Consistent with previous research, this study finds that accountants working in mid-tier firms identify more strongly with core professional values than their Big 4 counterparts.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Partner incentive schemes
    Home:

    http://commons.aaahq.org/groups/e5075f0eec/summary

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