Transparency reporting and partner remuneration in Australian audit firms

Abstract

To better understand how audit firms are governed, Australia has mandated the preparation and release of transparency reports by audit firms in 2013 with a focus on the disclosure on audit firm internal governance systems. These reports promote increased transparency regarding issues which are believed to contribute to audit quality. My thesis includes two empirical studies based on transparency report disclosures. In the first study, using the first-time disclosures in audit firm transparency reports, I summarise the governance and other information for the 21 leading Australian audit firms as disclosed in their first-time 2013 transparency reports. I find that audit firms meet the minimum transparency report disclosure requirements, but have different approaches to governance in the areas which may impact audit quality. I identify specific areas where transparency reports may give rise to future research opportunities. In the second study, I use disclosures from first-time mandatory audit firm transparency reports to investigate the association between the design features of partner remuneration schemes and audit quality. Specifically, I examine the influence of four features of partner remuneration schemes: the inclusion of performance-based compensation components, whether partner remuneration is linked to internally assessed measures of audit quality, whether partner remuneration is linked to client retention and acquisition and the size of profit sharing pool. Using the issuance of going-concern opinion and discretionary accruals as audit quality proxies, I find evidence of differences in audit quality related to partner remuneration schemes. I find that the inclusion of a link between partner remuneration and internally assessed measures of audit quality is associated with higher audit quality proxied by the issuance of going concern report and discretionary accruals. I also document that the inclusion of client retention and growth in partner remuneration schemes is associated with higher audit quality. However, I find mixed evidence of the role of performance-based components in partner remuneration schemes and find no evidence that the size of the profit sharing pool is associated with audit quality. My findings inform regulators and the profession that partner remuneration design features are associated with differences in audit quality.