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    Professionalism and Performance Incentives in Accounting...
    research summary posted July 24, 2017 by Jennifer M Mueller-Phillips, tagged 11.13 Partner incentive schemes 
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    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:

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