Empirical Evidence on the Implicit Determinants of Compensation in Big Four Audit Partnerships

Journal of Accounting Research (Forthcoming)

57 Pages Posted: 31 Jan 2013

See all articles by Warren Robert Knechel

Warren Robert Knechel

University of Auckland Business School

Lasse Niemi

Aalto University - School of Business

Mikko P. Zerni

University of Vaasa - Department of Accounting and Finance

Date Written: January 29, 2013

Abstract

This study investigates the implicit financial incentives of individual Big 4 audit partners by examining the association between a partner’s compensation and characteristics of the audit firm, audit partner, and individual partner clientele for Big 4 firms in Sweden. Using tax and financial data for individual audit partners and clients, our empirical findings indicate that there is significant variation in the implicit determinants that are associated with compensation across the Big 4. We find that audit partners’ compensation is positively associated with the size of their clientele or the number of publicly-traded clients, both of which represent revenue generating opportunities. Similarly, compensation and developing an industry specialization are positively related. In three firms, gaining clients is clearly related to an increase in compensation, while losing a client is associated with a reduction in partner income in only one firm. We find that audit partner income is more sensitive to performance-related incentives, such as attracting new clients, as partners progress in their career. Finally, we find evidence that audit failures, proxied by reporting errors related to issuing a going concern opinion, are associated with lower compensation. These results should be of interest to the auditing profession, audit firms and regulators when they consider the effects of implicit incentives of partner compensation on audit quality.

Suggested Citation

Knechel, Warren Robert and Niemi, Lasse and Zerni, Mikko P., Empirical Evidence on the Implicit Determinants of Compensation in Big Four Audit Partnerships (January 29, 2013). Journal of Accounting Research (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2208468

Warren Robert Knechel

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Lasse Niemi

Aalto University - School of Business ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Mikko P. Zerni (Contact Author)

University of Vaasa - Department of Accounting and Finance ( email )

P.O.Box 700
Vaasa, FI-65101
Finland

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