The effects of profit-sharing plans, client importance, and reinforcement sensitivity on audit quality

Herman Van Brenk, Barbara Majoor, Arnold M. Wright

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

Despite concerns that profit-sharing plans might have a detrimental effect on audit quality, there is little empirical evidence on this issue. We examine the effects of the type of profit-sharing plan, level of client importance, and auditor reinforcement sensitivity ( joint sensitivity to rewards and punishments) on auditor reporting decisions. By relying on agency theory and reinforcement sensitivity theory, we posit that the joint effects of profit-sharing and client importance on auditors’ decisions are contingent on reinforcement sensitivity. In an experiment with 450 audit partners and managers, we manipulate type of profit-sharing plan and client importance, and measure extroversion and neuroticism. We find the highest audit quality when profit-sharing is based on firm performance, client importance is low, and reinforcement sensitivity is high. Thus, instead of just modifying the type of profit-sharing plans, it is the mix of economic incentives and personality traits that affect audit quality.

Original languageEnglish
Pages (from-to)107-131
Number of pages25
JournalAuditing
Volume40
Issue number1
DOIs
Publication statusPublished - 2021

Bibliographical note

Publisher Copyright:
© 2021, American Accounting Association. All rights reserved.

Copyright:
Copyright 2021 Elsevier B.V., All rights reserved.

Keywords

  • Audit partner compensation
  • Economic incentives
  • Independence
  • Personality traits
  • Punishment sensitivity
  • Reward sensitivity

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