The influence of the performance measurement system on auditor’s quality threatening behaviour

The influence of the performance

measurement system on auditor’s

quality threatening behaviour

Master Thesis Accountancy & Controlling Rijksuniversiteit Groningen Supervisor: dr. S. Girdhar Co-assessor: dr. Y. Karaibrahimoglu Date: 18-03-2016 Word count: 12.323 Rémon Tanis S2188120 Damsterdiep 115 9713 EA Groningen remontanis@live.nl 06 23 96 82 21

Abstract

Motivation: This paper aims to look at the influence of the performance measurement system

of audit firms on audit quality threatening behaviour of auditors. If the performance measurement systems of audit firms pressurizes auditors towards profit maximization and compromising on audit quality this may result in increasing audit quality threatening behaviour of auditors.

Contribution: This study contributes a qualitative research of the influence of performance

measurement system in audit firms on audit quality threatening behaviour. Attention has been requested for more in-depth-studies of control practices in audit firms. Previous research found contradictory findings of the influence of management control systems on audit quality threatening behaviour. This gap in the literature needs further exploration.

Approach: This study makes use of semi-structured interviews with auditors of one Big 4

audit firm in the Netherlands. Semi-structured interviews allow this research to overcome the lack of explanatory power of other research methods. To operationalize the performance measurement system four key management controls which are embedded in the performance measurement system are identified; namely auditors individual compensation, time budget pressure, time deadline pressure and client acquisitions.

Results: The results provide a wide consensus that monetary compensation did not pressurize

auditors towards audit quality threatening behaviour. In addition, this study suggests that the time budget pressure is not considered as an important element for the performance evaluation of auditors. This is a contradictory finding with previous literature and therefore provides new insights of the influence of time budget pressure. While time deadline pressure was suggested as an explanator of audit quality threatening behaviour. Whereas the importance of client acquisitions seems decreased for the performance evaluation of auditors as it is considered as being overshadowed by performing high levels of audit quality. This might imply that the dominant commercial focus of audit firms is shifting back towards a focus on professionalism.

Conclusion: The performance measurement system of audit firms can be considered as a

complex control system which has the potential to constrain auditors to engage in audit quality threatening behaviour, but still contains management controls which have the potential to pressurize auditors towards audit quality threatening behaviour.

Inhoud

2.1 Performance measurement system 10

2.2 Auditors individual compensation 11

2.3 Time pressure 12

2.3.1 Time budgets pressure 13

2.3.2 Time deadline pressure 16

2.4 Client acquisitions 17 3 Research Design 19 3.1 Research settings 19 3.2 The interviews 21 3.3 Data analysis 22 4 Results 24

4.1 The performance measurement system 24

4.2 Auditors individual compensation 24

4.3 Time budget pressure 26

4.4 Time deadline pressure 28

4.5 Client acquisitions 30

5 Discussion 32

5.1 Auditors individual compensation 32

5.2 Time budget pressure 32

5.3 Time deadline pressure 33

5.4 Client acquisitions 34

6 Conclusion 36

6.1 Conclusion 36

6.2 Implications 37

6.3 Limitations and future research 37

1 Introduction

1.1 Introduction

Due to accounting scandals of e.g. Vestia, Ahold, Imtech and Lehman Brothers interest occurs in what is the quality of audits conducted by audit firms (Francis, 2004; Bricker, 2002; Manry et al., 2008). This interest occurs because audit firms audited and approved the financial statements of these firms. While afterwards appeared the financial statements did not faithfully represent the economic state of the audited firms. Thus, auditors incorrectly approved the financial statements and therefore the audit quality appeared to be insufficient. More specific to the Netherlands, the Dutch Authority of Financial Markets (AFM) reported that 45% of the reviewed audit reports were inadequate in terms of quality (Autoriteit Financiële Markten, 2014). The AFM is the independent governmental supervisory body which monitors the audit firms in the Netherlands. According to the AFM, the actions of Big4 audit firms which should ensure high audit quality were insufficient. This has a negative effect on the reputation of auditors as confidant of society with respect to auditing financial statements of entities of public interest (Jeacle, 2008). In its role of confidant of society, users of financial statements should be able to trust on the auditor’s opinion undoubtedly for their investment decisions. According to Sikka (2009) auditors should provide assurance to users of financial statements that the financial statements of firms present a true and fair view. The accounting scandals mentioned above show that audit firms not provided the level of assurance what users of financial statements expected from them.

One explanation of accounting scandals can be found in audit quality threatening behaviour of auditors (Lee, 2002). Audit quality threatening behaviour is behaviour of auditors which has the potential to adversely affect audit quality (Sweeney & Pierce, 2004). Previous research suggests that audit quality threatening behaviour of auditors is a reaction to a management control system (Sweeney & Pierce, 2006; Donnelly et al., 2003; Otley & Pierce, 1995; Alderman & Deitrick, 1982). For example the participating auditors in the research of Sweeney and Pierce (2006) considered audit quality threatening behaviour as necessary to comply with the requirements of the management control system. Given these previous findings, the concern rises of what is the influence of management control systems in

audit firms on audit quality threatening behaviour? Are the management control systems of audit firms, like their performance measurement system, insufficient to constrain audit quality threatening behaviour? Or even worse, pressurizes their performance measurement system auditors towards revenue growth, profits and bonusses and thereby pressurizes auditors to compromise on audit quality?

However in contrast to previous research, the studies of Malone and Roberts (1996) and Otley and Pierce (1996) suggest that management control systems in audit firms are associated with reductions of audit quality threatening behaviour. These previous findings suggest that audit firms might be able to constrain the occurrence and severity of audit quality threatening behaviour by paying careful attention to the effects of the management control system, like their performance measurement system. The performance measurement system is such a management control system for audit firms. A performance measurement system has the function to monitor and control the behaviour of employees and is used to constrain dysfunctional behaviour (Drury, 2008). This might be an underlying explanation of the findings in previous literature that management control systems are associated with reductions of audit quality threatening behaviour (Malone & Roberts, 1996; Otley & Pierce, 1996). As mentioned before, previous research also considered audit quality threatening behaviour as a reaction to a management control system, like the performance measurement system (Donnelly et al., 2003; Otley & Pierce, 1995).

This study recognizes this gap in the academic literature. Thereby these contradictory findings need further exploration. In addition, attention has been requested for more in-depth studies of management control practices in audit firms (Chenhall, 2003). The performance measurement system is a management control system which encompasses multipe management controls. So far, a compartmentalised approach has been used by previous academics. There has been a tendency to focus solely on specific elements of control systems, instead of focusing on a more comprehensive approach (Chenhall, 2003; Covaleski et al., 2003; Malmi & Brown, 2008). For example the study of Pierce & Sweeney (2004) focuses solely on budgetary control, whereas the study of van Herpen et al. (2005) focused on the influence of compensation plans as management control. Therefore, a scarcity of knowledge exists about performance measurement system in audit firms. Currently, a severe shortage of qualitative field studies exists in the area of management control systems in audit firms. This

severe shortage could be perceived as threatening for the audit profession (Gendron & Bédard, 2001).

1.2 Cost-quality conflict

The severage shortage of qualitative field studies in the area of management control systems might be a result of the difficulty to gain acces in audit firms to conduct a qualitative research (Sweeney & Pierce, 2004) as well as the interesting enviroment audit firms operate in. To obtain a better understanding of management control practice in audit firms it is important to recognize and identify the environment audit firms operate in. While audit firms operate in a particularly important and interesting environment for the study of performance measurement systems. Due to the conflict between audit costs and audit quality which exists in audit firms (McNair, 1991; Pierce & Sweeney, 2004). The conflict between audit costs and audit quality occurs due to the trade-off between the commercial viability and required high professional standards of audit firms (Sweeney & McGarry, 2011; Power, 2003). On one side, audit firms have to be focused on controlling and limiting the costs of their audits. Given the labour intensive nature of audit firms, audit hours are the dominant cost in audit firms (Rhode, 1978). Without controlling the costs of their audits, the commercial viability of audit firms will decline, because they are not able to keep up with the aggressive audit fee competition with their competitors (Beattie & Fearnley, 1998). On the other side, audit firms have to provide high levels of audit quality otherwise audit failures can decline their reputation, while a decline of reputation is found associated with the loss of clients (Skinner & Srinivasan, 2012). In addition, Herrbach (2001) argues that reputation is essential for the sustainability of audit firms. In general, audit quality is inverse related to audit failures. The more audit failures the lower the level of audit quality (Francis & Krishnan, 1999). Previous research suggests that it is difficult to achieve an appropriate balance between cost and quality of audits (McNair, 1991; Otley & Pierce, 1996).

The conflict between cost and quality is largely determined by many external parameters and cannot be changed significantly by a single audit firm. For example, audit quality standards are drafted and governed by various regulatory agencies. Whereas the audit fee structures are dictated by and formed in a highly competitive market, which can be interpreted as a form of market control (Macintosh, 1985). Considering this context in which audit firms operate, it is particularly important that audit firms identify the factors which they

actually are able to control and thereby utilize these controls to constrain the conflict between cost and quality by reducing audit quality threatening behaviour. This will not only help to improve the internal organizational functioning of the audit firms, but will also serve to the public interest by increasing the quality of audits.

1.3 Research question

Given the recent accounting scandals and criticism on audit quality of audit firms, the urgency to research performance measurement system of audit firms from the investors and audit firms perspectives is increasing significantly of importance. In order to address to the lack explanatory power of previous research (Sweeney & Pierce, 2004) this study makes use of interviews to explore the influence of the performance measurement system on audit quality threatening behaviour. Thereby this study provides a greater understanding of performance measurement systems and its influence on audit quality threatening behaviour. Interviews enable this study to conduct an in-depth examination of the influence of the performance measurement systems of audit firms on audit quality threatening behaviour of auditors, which is difficult to measure in quantitative figures (Sweeney & Pierce, 2006). Furthermore, this enables this research to get a deeper understanding of actual practice behaviour of auditors in audit firms, instead of very general of idealised information about auditors’ behaviour (Yin, 2013). It might contribute to the improvement of audit quality and prevention of accounting scandals. If this research concludes the performance measurement system is associated with a reduction in audit quality threatening behaviour and audit firms recognise the importance of paying careful attention to their performance measurement system. This can be a crucial step in regaining the trust of the users of financial statements in the expertise of audit firms. The knowledge gap in the existing literature needs further exploration and this research is serving as an expansion of existing literature. This research looks from the internal control perspective of audit firms on audit quality threatening behaviour of auditors. The purpose of this study is to develop a deeper understanding of the influence of the performance measurement system of audit firms on audit quality threatening behaviour. Following the central question of this research is:

‘’ How does the audit firms’ performance measurement system influence the auditors quality threatening behaviour?’’

1.4 Implications

This study might have theoretical implications for academics. Scholars focussed on management control systems in audit firms (Pierce & Sweeney, 2004; Pierce & Sweeney, 2005; Barret et al., 2005). However, contradictory findings were found with respect to the influence of management control systems, for example the performance measurement system, on audit quality threatening behaviour of auditors (Donelly et al., 2003; Malone & Roberts, 1996). This research might have implications for academics by broadening the knowledge of the influence of performance measurement systems on audit quality threatening behaviour. Given the academic knowledge about the accounting firms’ inner functioning is limited (Herrbach, 2005; Power, 2003; Gendron, 2002), this study can broaden the academic knowledge of performance measurement system in audit firms and influences of it on audit quality threatening behaviour. Thereby it might provide further explanations of the contradictory findings in the current academic literature. While the current academic knowledge has found no consensus with respect to the influence of peformance measurement systems on audit quality threatening behaviour of auditors.

Furthermore, this study might have practical implications for audit firms, investors and regulators. If this research concludes that the performance measurement system of audit firms pressurizes auditors towards revenue growth instead of performing higher audit quality. Consequently audit firms, which are focussed on and recognise the importance of audit quality, could re-develop and re-implement their performance measurement system, which could constrain audit quality threatening behaviour of auditors and thereby help to improve audit quality. This is important for the commercial viability of audit firms, because the reputation of audit firms is largely determined by audit quality (Skinner & Srinivasan, 2012). Because of its role as confidant of financial statements users, the reputation of audit firms is essential for the sustainability of audit firms (Herrbach, 2001). Furthermore it is important from the perspective of investors, because the quality of financial statements is dependent on the performance of auditors during the audit (McKnight & Wright, 2011). Which is in the interest of investors, because Wallman (1996) argues that the cost of capital would be higher and the capital market would operate inefficicent without high quality audits. Regulators of audit firms could oblige or pressurize audit firms to re-develop and re-implement their performance measurement system to focus on audit quality instead of profit maximization.

This could assist in reducing accounting scandalds and help to restore the trust in- and reputation of auditors by the users of financial statements.

1.5 Structure

This study is structured as follows. Section two presents a literature review of performance measurement systems and provides the key management controls. These identified managenemt controls, which are embedded in the performance measurement systems of audit firms, might influence the quality threatening behaviour of auditors. The third section provides the method of research in detail. In section four, the results of this study are discussed. Section five presents the conclusion of this resarch, implications for academics and practionioners and finishes with the limitations and suggestions for further research.

2 Literature review

2.1 Performance measurement system

Performance measurement systems, in a cybernetic view of contracting, are supposed to create incentives that align organizational objectives and individual goals and provide feedback information on the progress of these objectives and goals (Cavalluzzo & Ittner, 2004; Heinrich, 2002). Thus monitoring auditors by using performance measurement systems might result in the alignment of organizational and individual goals. The impact of the performance measurement system on audit quality might have different implications if the aligned goals are focused on profit maximization or audit quality. Furthermore, the performance measurement system is a manner to monitor and control the behaviour of employees. The goal of this the performance measurement system is to translate the firms’ strategy into practice to its employees (Kaplan & Wisner, 2009) and thereby monitor and control behaviour of employees (Drury, 2008). The performance of auditors is evaluated periodically by its superiors in hierarchy. This formal evaluation is significant of importance for the auditors’ career progression (Hanlon, 1994) and forms the basis for compensation.

Previous literature argues that audit quality threatening behaviour is a reaction to a manegement control system, like the performance measurement system (Otley & Pierce, 1995; Donnelly et al., 2003). Audit quality threathening behaviour is defined as: ‘’behaviour by auditors which has the potential to adverseley affect audit quality’’ (Sweeney & Prierce, 2004). This audit quality threatening behaviour can impact audit quality directly and indirectly. Examples of audit quality threatening behaviour are premature sign-offs without completing the audit procedure (Otley & Pierce, 1995; Rhode, 1978, Alderman & Deitrick, 1982; Pierce & Sweeney, 2003), gathering insufficient audit evidence (Alderman & Deitrick, 1982), processing inaccurate audit evidence (McDaniel, 1990), the deletion of audit steps (Margheim & Pany, 1986), accepting weak client explanations and conducting superficial reviews (Pierce & Sweeney, 2003; Kelley & Margheim, 1990). Previous research has shown that time record manipulation is also an example of audit quality threatening behaviour (Smith, 1995; Lightner et al., 1982; Kelley & Margheim, 1990).

The performance measurement systems of audit firms are not only based on generating revenues or increasing audit quality. It is a combination of multiple management controls. This study argues that performance measurement system of audit firms contains key

management controls that might impact audit quality threatening behaviour of auditors. This study argues that there are several management controls which are important for the evaluation of auditors and thereby are embedded in the performance measurement systems of audit firms. These key management controls are the auditors individual compensation, time budget pressure, time deadline pressure and client acquisitions. This suggestion is supported by Sweeney and Pierce (2004), Pierce and Sweeney (2004), van Herpen et al. (2005), Otley and Pierce (1996) and McNair (1991). Kaplan and Norton (2001) emphasizes the importance of linking the reward system to the performance measurement system. Whereas van Herpen et al. (2005) argue that monetary compensation can be a signficiant motivator for employees. Pierce and Sweeney (2004) argue that performance evaluations are related to time pressures and Donnelly et al. (2003) noted that time pressures are significant important in the evaluation process. Whereas McNair (1991) stated that time pressures can become a pressure for the auditor when they act as performance evaluation tool. Hanlon’s (1999) research suggests the ability to acquire new clients is associated with promotional decisions during the performance evaluation of auditors.

By dividing the performance measurement into these sub-themes we place the performance measurement system in categories that operationalize the key management controls to which auditors are faced with because of the performance measurement system. These management controls might pressurize or constrain auditors to engage in audit quality threatening behaviour.

2.2 Auditors individual compensation

According to Bonner and Sprinkle (2002) monetary incentives play a fundamental role in motivating and controlling the behaviour of employees. When monetary incentives are able to motivate and control the behaviour of employees the focus or basis of measurement for monetary compensation becomes important. If an auditor is rewarded for performing high levels of audit quality, it is likely he is motivated to perform high audit quality and therefore not engages in audit quality threatening behaviour. The potential compensation affects his motivation, which affects job effort and eventually performance (van Herpen et al., 2005). The auditor’ focus during an audit might be pressurized towards quality, because performing a high level of audit quality might result in obtaining the potential compensation. The potential compensation becomes a motivation for the auditor to increase his job effort on audit quality.

Considering the auditor strives to obtain the compensation, this could result that he will not engage in audit quality threatening behaviour. Whereas engaging in audit quality threatening behaviour is associated with a decrease in audit quality (Sweeney & Pierce, 2004). If the audit quality appears to be insufficient, this could impact his performance evaluation significantly and he might not obtain the monetary compensation. Furthermore, Young et al. (2012) study argues that financial incentives are associated with improved performance. Thus, auditor individual compensation might constrain audit quality threatening behaviour if it is used to motivate or control the behaviour of auditors.

On the other hand, as noted by Rynes et al. (2005) monetary compensations can be so powerful they might motivate employees to engage in dysfunctional behaviour. If the performance measurement system rewards auditors monetary for generating profits and meeting budgets, it can be suggested that auditors are motivated to generate profits and meet their budgets. As a response auditors might compromise on audit quality by conducting audit quality threatening behaviour. Conducting audit quality threatening behaviour enlarges the likelihood to meet predefined individual or organizational objectives. Therefore an auditor might engage in premature sign-offs without completing the full procedure, the deletion of audit steps or accepting weak client explanations (Pierce & Sweeney, 2003). These examples of audit quality threatening behaviour are likely to result in less conducted audit hours which reduces the dominant cost (i.e. labour costs) for the audit firm of an audit engagement. Therefore the profit of an audit increases and enables the auditor to meet his budgetary objective. A high profit of an audit might result in the potential monetary reward for the auditor, if that is the focus of the measurement for monetary rewards.

These previous studies suggest that financial compensation for the auditor might be able to motivate employees to achieve aligned goals or pressurize them to engage in audit quality threatening behaviour. However, if the individual compensation is determined by revenue growth or audit quality this might have different implications for audit quality threatening behaviour of auditors.

2.3 Time pressure

The Panel of Audit Effectiveness found that dysfunctional audit behaviour is a chronic concern for audit firms (Public Oversight Board, 2000). Based on their findings The Panel of Audit Effectiveness recommended audit firms to consider managing the risk from excessive

time pressures on auditors as a high priority of business. Time pressure refers to time budget pressure (Hyatt & Taylor, 2013; Willet & Page, 1996; Otley & Pierce, 1996) and time deadline pressure (Kelley et al., 2011; Eden, 1982). Time budget pressure refers to continuous time pressure, thus with a persistent character. It results from the incentive to reduce audit hours regardless when the work has to be finished. Tight time budgets and tight monetary budgets are the main pressures for time budget pressure. Time deadline pressure can be described as acute time pressure, thus a short term with high impact pressure. Time deadline pressure refers to if the work is completed before a specified date. Kelley et al. (2011) emphasizes that researchers must consider time budget pressure and time deadline pressure separately. Suggesting they might have different impacts on audit quality threatening behaviour.

2.3.1 Time budgets pressure

Audit engagements have to be completed within a limited timeframe and budget based on an agreement between the client and audit firm. Conflicts between cost and quality appear to be present in audit firms (Pierce & Sweeney, 2004) and time budgets are an important influence in the cost quality conflict in audit firms. The conflict between audit costs and audit quality encompasses the trade-off between the commercial viability and the required high standards of audit firms (Sweeney & McGarry, 2011). On one side, audit firms have to be focused on controlling their dominant costs to be able to keep up with the audit fee competition with competitors (Beattie & Fearnly, 1998). Whereas their dominant cost are audit hours, given the labour intensive nature of audit firms. On the other hand, audit firms have to provide high levels of audit quality; otherwise audit failures can decline their reputation (Skinner & Srinivasan, 2012). Furthermore, previous research suggests that it is difficult to achieve an appropriate balance between controlling the conflict between cost and quality of audits (McNair, 1991; Otley & Pierce, 1996). According to auditors, time budget pressure is an explanator of audit quality threatening behaviour (Raghunathan, 1991). Several studies support this suggestion and show a positive association between budget tightness and audit quality threatening behaviour (Pierce & Sweeney 2004; Yuen et al., 2013). For example, an auditor who conducts the audit steps for the provisions account and doubts the principles of the provision used by the management. The auditor suspects that the management applies unrealistic principles of the provision to influence their income statement, which will not

demonstrate a true and fair view of the financial state of the firm. The auditor therefore suspects the management is applying earnings management. In this case, the financial statements are possibly misleading to users. To assure the financial statements are not potentially misleading to users, the auditor needs to obtain more insight in the principles of the provision applied by the management. Therefore he needs to conduct extra audit hours. As, Caramanis and Lennox (2008) found a relationship between audit hours and earnings management. They suggest that when less audit hours are conducted during an audit, companies are more likely to manage earnings upwards.

However, if budget realization is important for the performance evaluation of the auditor and the auditor confronted with a tight budget for this audit engagement he might be less critical in his judgement of the principles of the provision. As a response the auditor reduces the quality of audit work. The auditor might accept a weak client explanation for applying these principles. Otherwise, more audit hours are necessary, which can lead to a budget overrun. By accepting a weak client explanation the auditor might avoid a budget overrun, because he will not conduct the extra audit hours. Accepting weak client explanations is an example of audit quality threatening behaviour (Pierce & Sweeney, 2003). Another example of audit quality threatening behaviour is premature sign-off, which is the most harmful for audit quality and refers to signing off an audit without completing all the work steps (Coram et al., 2008). Thereby the auditor signs the auditor’ opinion before all work steps are well audited and documented. This is another response to limit the audit hours and thereby a manner to avoid a budget overrun. While budgets adjustments are perceived as no discussable with their superiors (McNair, 1991). On the other hand, it is likely more audit hours are necessary to assure the quality of the financial statements. In support of this statement, Baker (2005) suggests that less audit hours results in lower audit quality. The importance of meeting budgets in performance measurement systems is confirmed by auditors who argue that budgets still play a significant role in performance measurement systems (Pierce & Sweeney, 2004). Exceeding the engagement budget may negatively affect the auditor’s evaluation, if his performance evaluation is largely based on budget realizations. The auditor finds himself in a ‘’zone of compromise’’ (McNair, 1991). Here rises the conflict between cost and quality for the auditor. On one hand the auditor needs to conduct more audit hours to assure the required level of audit quality, however this could go at the cost of its budget and result in a budget overrun. Auditors might respond to the conflict between cost

and quality by engaging in audit quality threatening behaviour (Pierce & Sweeney, 2004) like time record manipulation or reducing the quality of audit work (Malone & Roberts, 1996; Otley & Pierce, 1996; McNair, 1991).

Time record manipulation refers to charging less hours to a job than actually worked. Previous research of Lightner et al. (1983) and Shapeero et al. (2003) suggests that auditors have the tendency to manipulate their time records by underreporting the audit hours they worked. Time record manipulation can result in the continuation of artificial tight budgets which can lead to reducing the quality of work (Kelley et al., 2011). This would imply an indirect effect on audit quality, because auditors will be confronted with the same tight budget for the following audit of next fiscal year and places the auditor year after year in the ‘’zone of compromise’’. If the auditor needs to conduct 80 audit hours in fiscal year A for an audit, but registers only 60 audit hours. The following auditors will be confronted with the same artificial tight budget in the next fiscal year, because the budget is largely based on previous year and therefore assumes 60 audit hours are suitable for the audit engagement. Due to this artificial tight budget the auditor is faced again with the conflict between cost and quality and places the auditor in the ‘’zone of compromise’’. Or the auditor compromises on his budget and accepts a budget overrun to assure the quality of the audit by conducting extra audit hours. Or he compromises on audit quality to prevent a budget overrun by conducting less audit hours. Thus time record manipulation may decrease labour costs in the short term, but it carries the risk of uncompleted audits towards the future (Yuen et al., 2013).

Research of McNamara and Liyanarachchi (2008) and Otley and Pierce (1996) show that time record manipulation and reducing audit quality significantly increases when time budgets become more difficult to achieve. This suggests when time budgets become more difficult audit quality threatening behaviour occurs more often. The study of Kelley and Margheim (1990) found an inverted U-shaped relationship between tight budgets and audit quality threatening behaviour. An increase in budget tightness is associated with an increase in audit quality threatening behaviour, but if the budget tightness increases beyond a certain level audit quality threatening behaviour might decreases. An auditor might perceive the budget as impossible to attain. Therefore the auditor might shift his focus completely towards the quality of the audit, because the budget is unattainable on forehand. Audit quality then is the only element on which the auditor can demonstrate he performed well during the audit.

2.3.2 Time deadline pressure

Time deadline pressure refers to an acute time pressure for auditors. According to Eden (1982) and Kelley et al. (2011) time deadline pressure is more harmful and stressful to an individual’s performance than time budget pressure. Time deadline pressure is due to pressures to work on another assignment or a deadline imposed by a client. Increasing client demands and staff shortages are other causes which can result in time deadline pressure (DeZoort & Lord, 1997). Kelley et al. (2011) found that auditors experience time deadline pressure more often than time budget pressure. Time deadline pressure can result in quality threatening behaviour of auditors. For example, an important client with bargaining power may be able to demand that the audit is completed before a certain deadline. Despite, if all necessary audit steps are already conducted. This might result that the auditor is confronted with a time deadline as a consequence he might finds himself in the ‘’zone of compromise’’ (McNair, 1991). Exceeding the time deadline may affect the auditors’ evaluation, if meeting time deadlines is an important element of the auditor’s evaluation. The study of Donnelly et al. (2003) suggests time deadlines are an important element in the evaluation process of auditors. Not conducting all necessary audit steps might impact audit quality. The conflict between cost and quality rises here for the auditor. To avoid these potential consequences for his performance evaluation, the auditor is not able to make use of time record manipulation as a response to this conflict, because the job has to be completed before a specified date. Despite this, an auditor might respond to this conflict by engaging in audit quality threatening behaviour. Reducing audit quality will reduce the required time for the audit work and enlarges the expectations of meeting the deadline. Therefore the auditor might accept weak client explanations, executes superficial reviews (Pierce & Sweeney, 2003; Kelley & Margheim, 1990) or conducts a premature sign off before completing all the necessary procedures (Otley & Pierce, 1996). This enables the auditor to complete the audit engagement before the time deadline and avoid potential negative consequences of exceeding a time deadline, wheareas meeting time deadlines is suggested as important for the performance evaluation of auditors by Donnelly et al. (2003). The study of Pierce and Sweeney (2004) suggests that time deadline pressure is a significant explanator of audit quality threatening behaviour.

In contrast, previous research suggests that time deadline pressure also have positive effects on the behaviour of auditors. For example, Choo (1995) argues that if time deadline

pressure level increases from low to moderate auditor judgemental behaviour increases, because irrelevant cues are ignored. However, Choo (1995) also argues if time deadline pressure levels increase from moderate to high, auditor judgemental behaviour decreases. Glover (1997) provides evidence that even high levels of time deadline pressure are able to reduce judgemental biases and therefore increases auditor judgemental behaviour. The effectiveness of the work increases without conducting audit quality reducing behaviour, like gathering insufficient audit evidence (Alderman & Deitrick, 1982) or processing inaccurate audit evidence (McDaniel, 1990). Summarizing, these previous studies show positive and negative associations between time deadline pressure and audit quality threatening behaviour. This implies that the literature shows inconsistent results according to this association.

2.4 Client acquisitions

Clients’ acquisitions might be another incentive for auditors to engage in audit quality threatening behaviour. Previous research suggests that promotions above the rank are dependent on the ability of the auditor to acquire new clients (Hanlon, 1999). These promotion decisions are taken during the performance evaluations of auditors. This formal evaluation is of significance importance for the auditors’ career progression (Hanlon, 1994). Greenwood and Suddaby (2006) suggest audit firms shifted their emphasis during the performance evaluations towards commercialism and promoted partners on their commercial capabilities instead of their technical competences. This suggests auditors have an incentive to acquire new clients to promote above their rank or to obtain a better performance evaluation. If client acquisitions are important for the performance evaluation, being commercial active might contribute to a better performance evaluation and thereby to a potential promotion towards a rank above the current level or even towards the level of partnership. Therefore engaging in commercial activities might have a positive impact on the performance evaluation of auditors. Findings of Gibbins and Jamal (2006) suggest that short-term measures of auditors performance, like client acquisitions, largely determine the performance evaluation of auditors. Previous research found that making-profits was the main focus of audit firms (Sweeney & McGarry, 2011; Gendron et al., 2006; Wyatt, 2004). Although auditors idenditifed other goals of partners, like audit quality and client satisfaction, eventually they were all related to the primary goal of making profits. Furthermore from the level of manager commercial skills are important for promotions in audit firms (Sweeney & McGarry, 2011;

Grey, 1998). This strengthens the suggestion that audit firms emphasize on the importance of client acquisitions during the performance evaluation.

While previous research suggests being active in commercial activities might contribute to a better performance evaluation, the question rises how do auditors acquire new clients? The process of acquiring new clients largely contains negotiations between the audit firm and the client. During the process of negotiations between audit firms and clients about the audit firm’s compensation for conducting an audit, audit quality threatening behaviour might occur. Auditors experience these negotiations as a normal part of their business practice (Gibbins et al., 2011). Clients of audit firms make use of the sequential selection process (Tros, 2015). Therefore the focus of clients during the selection process of which audit firm is allowed to conduct the audit, is mainly based on the audit firm who offers the lowest price. Audit firms are able to lower their audit price propositions by reducing the audit scope, for example by the deletion of audit steps (Tros, 2015). This is an example of audit quality threatening behaviour in which auditors are able to engage in (Margheim & Pany, 1986). If the auditor not reduces the audit scope, he might not contract the client and consequently will not meet his target of client acquisitions. This could have negative consequences for his performance evaluation and therefore an auditor might engage in audit quality threatening behaviour.

Furthermore, retaining current audit engagements is another manner for auditors to be commercially active. This is another manner for auditor to be engaged in commercial activities and contribute to generating revenues for the audit firm. However, the research of Jackson et al. (2008) suggests clients of audit firms have no incentive to change of audit firm given the increased costs and limited benefits. In addition, their study suggests that audit quality increases with audit firm tenure. This suggests that clients have no incentive to rotate their audit firm. Therefore we argue the the succesful continuation of current audit engagement, i.e. retention, probably not contribute to an improved performance evaluation.

3 Research Design

Previous studies of audit quality threatening behaviour used survey questionnaires, experiments or multivariate models (Pierce and Sweeney, 2004). The explanatory power of these studies was low (Sweeney and Pierce, 2004). To overcome this lack of explanatory power this research makes use of semi structured face-to-face interviews to gather unique internal data. This enables this qualitative research to be exploratory in this field of research and get a deeper understanding of the performance measurement system as a management control system in audit firms. Furthermore, this type of research enables to focus on the influence of the performance measurement systems of audit firms on audit quality threatening behaviour of auditors, which is difficult to measure in quantitative figures (Sweeney & Pierce, 2006). While actual practice, behaviour of employees and the underlying reasoning of it is difficult to quantify in numbers. In addition, quantifying behaviour of employees often results in very general or idealised information (Yin, 2013).

3.1 Research settings

Auditors of one Big 4 audit firm located in the Netherlands are interviewed. At first, there is chosen to interview auditors from a Big 4 audit firm, because all together the Big 4 audit firms in the Netherlands audit the financial statements of 99% of public listed companies in the Netherlands (Steman, 2009). If audit failures occur at public listed companies, is it likely to have a larger impact on a larger number of different stakeholders, like the Tax Authorities, employees, investors, suppliers and clients. It is likely that an audit failure of a public listed company would have a larger impact on a larger number of stakeholders, than if an audit failure would occur at the local Bakery on the corner, which is audited by non-Big 4 audit firm. Therefore this research is conducted at a Big 4 audit firm. In addition, the audit failures mentioned in the introduction section were audited by one of the 4 Big-audit firms. Therefore we argue that the Big 4 audit firms have a larger impact on the decisions of users of financial statements than small audit firms, while they have been more involved in audit failures with a significant scope than non-Big audit firms.

Furthermore, previous studies did not find significant inter-firm differences between the Big-audit firms (Sweeney & Pierce, 2006; Otley & Pierce, 1996). To obtain a complete understanding of the performance measurement system of one Big 4 audit firm, and given no significant inter-firm differences between the Big audit firms, this study argues it is suitable to interview auditors of a single Big 4 audit firm. The Big 4 audit firm located in the Netherlands which has been selected has multiple offices throughout the main cities in the Netherlands. In addition, the firm has several service lines like assurance, tax, advisory, transactions and others. Whereas this study focusses on the assurance service line of the audit firm. The firm is one of the Big-audit firms in the Netherlands and has more than 3.500 employees in the Netherlands. The audit firm has generated more than 600 million revenues in the Netherlands solely in 2014. The above facts show that the selected audit firm is a major player in the audit business in the Netherlands. While this is a study of professional practice, looking at a detailed case study, it can help to assure that the collected information is not very general or idealised, but presents a description of actual behaviour. In addition, the case study method is found to be most likely appropriate for the ‘’how’’ research questions (Yin, 2013). By conducting this case study this research will provide a deeper understanding of the performance measurement system.

By conducting this research in the Netherlands we add the to existing literature research settings, including Ireland (Otley & Pierce, 1996), France (Herrbach, 2001), United States of America (Kelley & Margheim, 1990) and the United Kingdom (Willet & Page, 1996), of formal control systems and its influence on audit quality threatening behaviour. This study argues that data from the Netherlands is representative for modern audits in Europe, North America and other developed economies because they demonstrate similarities. The economy and legal institutions of the Netherlands are highly developed; this is in line with the scores La Porta et al. (1998) assigns to countries like the United States of America, Ireland, France and the United Kingdom. Moreover, the Big 4 firms use audit methods which are standardized worldwide (Blokdijk et al., 2006). This implies that the audit methodoly of a Big 4 audit firms are universal and therefore this study believes it is suitable to conduct this research in the Netherlands and still has the potential to be respresentive for modern audits in Europe, North America and other developed economies.

3.2 The interviews

Before the interviews were started, a trial interview was conducted. This allowed this study to improve and refine the interview guide where necessary. The number of interviewees was determined during data collection, dependent on the point where no new insights were revealed (Lincoln & Gruba, 1985; Ritchie et al., 2003). Auditors with the function manager or senior manager have been selected and interviewed. Besides the fact that these auditors have managerial responsibilities and have more than 5 years’ experience as auditor, managers are most involved with the quality of an audit, because they conduct most of the interviews with their clients and review the work of staff members. In summary, these auditors are ‘in charge’ of the audit engagement. Furthermore, prior research has shown that senior managers engage frequently in audit quality threatening behaviour (Malone & Roberts, 1996). Partners are particularly the commercial entrepreneurs of the audit firm, whereas staff members have a lack of experience and do not have the decision rights to influence audit quality dramatically. Therefore managers or senior managers of the audit firm are chosen to be interviewed. Finally, eleven auditors are interviewed during the data collection. Including nine male auditors and two female auditors. The function level showed a more equal distribution, as six auditors were manager and five auditors were senior manager. Also the distribution of experience at the audit firm was more equal divided. Whereas five auditors worked one to ten years in the firm, three auditors eleven to twenty years and three auditors were more than twenty-one years employed at the firm. The age of the interviewee is also equally distributed. The sample of interviewees shows us a divergent group of auditors on the level of (senior) manager. This is all is referred to in table 3.1, table 3.2 and table 3.3. The only discrepancy is the number of females. However, this is unlikely to overcome while the audit firms are still dominated by males (Wielaard & Prikken, 2015).

Table 3.1

Function level Manager Senior Manager Total

Male 5 4 9

Female 1 1 2

Table 3.2

Experience at firm 1-10 11-20 21-50 Total

Male 4 2 3 9

Female 1 1 0 2

Total 5 3 3 11

The interviews took between 45 and 60 minutes. The interviews were conducted at the end of 2015. The interviews were recorded, with the permission of the interviewees, and remain confidential and anonymous. The interview has been semi-structured to collect the data. This enables this study to maintain flexible if necessary. To eliminate biases and minimise variation an interview guide has been used to ensure consistency through the questions and complete coverage of the themes during the interviews (Patton, 1990). If necessary the researcher made use of follow-up questions to obtain greater understanding of the participant’s meaning (Legard et al., 2003). During the interview, briefly the structure of the performance measurement system has been discussed followed by its main management controls which are embedded in the performance measurement systems. The main part of the interview deals with the influence of the key management controls of the performance measurement system of the audit firm on audit quality threatening behaviour. The potential effects of the performance measurement system on the audit quality threatening behaviour of auditors are divided in the key different elements in the interview, mentioned in the literature. The theoretical framework formed the basis for the interview guide.

3.3 Data analysis

From the researchers perspective it is important to realize that no single research method has the potential to be truly objective (Pierce & Sweeney, 2005). Therefore it is important to be transparent and document all the steps that are taken to increase the

Table 3.3

Age 18 - 35 36-50 51-65 Total

Male 3 3 3 9

Female 1 1 0 2

objectivity as far as possible and maintain a constant alertness for subjectivity during the collection and analysis of the data (Patton, 1990). First, the interview guide was used to eliminate biases and ensure a complete coverage of the themes in each interview. Second, the interviews were taped and in addition notes were made if contradictory responses occurred. These contradictory explanations were further discussed for further explanation. Third, verbatim transcripts were directly prepared after each interview in separate documents. One week after the interview the tapes were re-listened and the verbatim transcripts were improved when necessary. Fourth, a structured analysis method was used to analyse the data. The verbatim transcripts and additional notes of the interviews were examined systematically multiple times. To ensure a complete and rigorous analysis of the findings, a summary of key findings for each interview was prepared (Lillis, 1999). This method was used to eliminate irrelevant phrases of the interviewees. The examination of the data was executed manually to identify the key themes of the data. The data was divided into clusters and the emerging relationships were identified through recurring patterns related to the theoretical literature. After the first draft of the analysis of the data this method was repeated to ensure all relevant findings and necessary quotations were presented in the results section in the correct manner. The revealed relationships were used to address to the research question initially stated in the introduction (Scapens, 2004).

4 Results

4.1 The performance measurement system

The performance measurement system consists of a cycle of twelve months during the fiscal year of the audit firm. The cycle encompasses a mid-year review, a year-end review and roundtables conversations. An auditor starts the cycle by preparing his goal plan in which he defines his individual objectives linked to his function level. The objectives are preferable related to the four quadrants: markets, operations, people and quality. If an auditor works more than a certain amount of hours on an audit engagement he is obliged to requests reviews. These reviews are prepared by the auditor’ supervisors about his performance during the audits. These reviews are discussed with his counsellor and registered in the performance measurement system. This process is used during the mid-year review and year-end review. The reviews of colleagues and discussions with the counsellor form the input for the roundtable conversations. Partners, senior managers and a member of human resource management are present during the roundtable conversations. The counsellor presents his counselee during the roundtable and gives a suggestion for a rating. The counselee is discussed during the roundtable conversations and is assigned a rating from one to five. If the attendants of the roundtables are not able to find a consensus about the rating for the auditor, the partner eventually decides and assigns a rating to the auditor. The performance measurement system is used to structure and objectify evaluations. Although, it is generally accepted that the system contains a large subjective part. Furthermore, it has the function to monitor and motivate auditors and it forms the basis for compensation and promotion.

4.2 Auditors individual compensation

The importance of an appropriate monetary compensation for the individual auditor was referred to by many auditors. The auditors mentioned that a monetary compensation is an important motivator for auditors to conduct their work according the rules and procedures drafted by the audit firm. Due to the high work-pressure and required flexibility, in comparison to other sectors, an appropriate monetary compensation was mentioned as an important motivator for auditors to conduct their work. One auditor stated is as following:

‘If you look at the effort and flexibility we have to put in our job in comparison to other jobs, an appropriate monetary compensation is definitely an important motivator (A10)’.

Whereas another auditor stated it differently: ‘When you start in this profession, you know a certain level of compensation is offered. Otherwise you would probably not even do this job (A7)’.

The contrary effects of monetary compensation were also acknowledged by the auditors. When monetary compensation was experienced as too low, this could result in a decrease of the motivation of the auditor. For example, an auditor referred to the past when his salary increased just above inflation:

‘When my salary increase appeared to be just above inflation, my purchasing power remained largely the same, so in actual euro’s there was not much progress, that had an impact on my motivation (A4)’.

However, as discussed in the literature review, when monetary compensation is able to motivate employees to conduct their work according the rules and procedures the focus or basis of measurement for the monetary compensation becomes important. In other words, are the auditors rewarded for generating revenues, performing high levels of audit quality or other achievements? In order to obtain a better understanding if the auditors were pressurized towards a certain direction for their monetary compensations, the auditors were specifically questioned on what are opportunities to influence your monetary compensation. As a response a wide variety of opportunities were referred to. Opportunities like achieving budgets, working overtime, additional activities beside the regular work, concern towards quality, acquisition of clients and the communication towards clients and team members came up. Whereas client acquisitions and concern towards quality were mentioned most frequently. However, according to the auditors the process of salary increases and bonuses lacks a substantial amount of transparency. No auditor knows precisely what contributes to a salary increase or bonus.

‘It is unclear if I acquire three new clients or perform high levels of audit quality, my salary increases with a certain percentage or I will get rewarded with a bonus of a certain amount. It is a vague process (A10)’.

In addition, it was generally felt that the percentages of salary increases and actual rewarded bonuses have been marginal the last years. Due to the unclear compensation process, perceived low potential salary increases and modest bonuses, the potential extra monetary rewards were not considered as an incentive to behave dysfunctional and engage in audit quality threatening behaviour. Although, the auditors argued that monetary compensation is a motivator for auditor to conduct their work. The limited magnitude of the salary increases or bonuses might not be powerful enough to motivate the auditors to behave dysfunctional and thereby engage in quality threatening behaviour. In addition, there was a strong consensus among the auditors that the standard salary was considered suitable for the work the auditors had to conduct. Overall, a wide consensus was found that monetary compensation did not pressure auditors to engage in audit quality threatening behaviour.

4.3 Time budget pressure

The interviews revealed different considerations of the importance of time budgets for the performance evaluation of auditors. While, the general attitude of the auditors towards the importance of time budgets for their performance evaluation was that time budgets were not significant for their performance evaluation. The majority of the auditors emphasized that time budgets are rarely achieved:

‘Time budgets are a quantitative measurable element; however in practice they are almost never realized. Conclusion: it is a worthless measuring tool and thereby a worthless evaluation tool (A1)’.

A few auditors referred to the changing audit environment and changing culture within the firm as the reasons for this diminished importance of time budgets for their performance evaluation:

‘Partners realize budgets are too tight, they emphasize less on the realisation of time budgets, quality goes first (A6)’. Whereas another auditor mentioned he had never experienced during the performance evaluations that there was a significant emphasis on the realisation of budgets (A10). Besides that, other auditors referred to the time budget pressure as a pressure which is easy to cope with. ‘By decreasing the margin on an engagement audit, you can diminish the magnitude of a budget overrun. Apply this method and the time budget pressure is solved (A2)’.

Although, there was a stronger consensus that time budgets were not an important aspect for the performance evaluation of the auditors. In contrast, some auditors referred to time budgets as an important element during their performance evaluation. These auditors felt budget overruns could negative impact their performance evaluation.

‘Partners are aware budgets are tight, but they just do not accept budget overruns (A4). The partners, one of them is my counsellor, they are mainly interested in engagement economics. I believe definitely that my time budget realization is an important element for my evaluation (A7)’.

The auditors who felt budget overruns could have a negative impact on their performance evaluation, responded to this pressure by engaging in underreporting of time. The auditors referred not to other types of audit quality threatening behaviour as a response to time budget pressure. Other auditors referred to underreporting of time as a threat for audit quality. They considered underreporting of time as a threat for audit quality due to the continuation of artificial tight budgets. This is in line with the study of Kelley et al. (2011).

‘If auditors not report all their audit hours, we will never know the cost price of an audit and this will result in the continuation of tight budgets in the future (A8, A10, A11)’.

A clear link was showed between auditors who considered time budgets as an important element for their performance evaluation and those who engaged in underreporting of time. As the auditors who referred to time budgets as an important element for their performance

evaluation, were also the auditors who engaged in underreporting of time as a response. Another interesting finding was that these auditors were the only auditors who mentioned they frequently achieved their budgets. One auditor gave the following explanation for this behaviour:

‘If I would write all my hours, than it would be at the expense of my budget on which I will be evaluated (A3)’. In addition as a manager, I will receive no extra compensation if I write more hours; it simplifies the choice (A7)’.

This finding, although only a few auditors referred to it, suggests that time budget pressure can result in audit quality threatening behaviour. However, in this study over more than half of the auditors mentioned that time budgets were not considered as an important element for their evaluation and thereby did not pressurize them towards audit quality threatening behaviour.

4.4 Time deadline pressure

In generally, time deadlines were considered as an important element for the performance evaluation of auditors. A few auditors referred to the association between client relationship and meeting deadlines and its importance for their performance evaluation. Whereas the auditors considered time budgets as an internal issue and therefore more easily to cope with. Exceeding deadlines and its linkage with client relationship was considered as an external issue which could influence their performance evaluation. They referred to the negative effects exceeding a time deadline could have for your client relationship.

‘If you exceed a deadline, your client relationship is put under pressure. And eventually it is the client who is the source of the revenues for the firm. Too much pressure on your client relationship is a consequence you want to avoid. Especially, because it will be evaluated during your performance evaluation (A10).

Other auditors referred to the willingness of auditors to meet deadlines: ‘we are service providers; we will always try to meet deadlines. Deadline are difficult to delay

and results in a dissatisfied client (A2)’. ‘If you exceed a deadline, it definitely will have consequences for your performance evaluation (A8)’.

As a response to the time deadline pressure auditors mentioned they engaged in audit quality threatening behaviour. While the auditors are not able to make use of time record manipulation as a response to this pressure. Reducing the audit quality is a manner which allows the auditors to reduce the required time for an audit and thereby enlarges the possibility to meet the deadline. A variety of responses were mentioned by the auditors how they reacted to and dealt with the time deadline pressure when occurred. Most frequently referred to was the lack of a grounded and accurate documentation of audit steps in the audit file:

‘I definitely believe shortcuts are made in the documentation of audit steps. If that occurs, all key issues are seen and assessed, but the documentation in the audit file has still room for improvement (A7)’. ‘In the documentation of audit steps shortcuts are made, for sure (A4)’. ‘When the deadline is rapidly approaching, then it occurs the documentation is insufficient, however all the key quality issues are seen and evaluated (A10)’.

A few other auditors referred to the deletion of audit steps as a manner to deal with the time deadline pressure when faced with. ‘If a deadline comes quickly closer, and you have to do ten assignments, but your time allows you to do only seven, then you just have to

delete the less important ones: It does not happen often, but it occurs (A6)’.

The findings suggest auditors engage in audit quality threatening behaviour as a response to time deadline pressure. This suggests that time deadline pressure is a significant explanator of audit quality threatening behaviour. As justification for engaging in these types of audit quality threatening behaviour the auditors mentioned the time after a deadline they had time left to improve the audit documentation before it would be finally archived and stored.

However, some auditors argued that the extra time for ‘’file pimping’’ was often used for other audit engagements. ‘When we have achieved a met, the pressure is off. Also on the audit file (A10)’.

In addition, there was a strong consensus that time deadline pressure was more harmful for dysfunctional behaviour than time budget pressure. Due to its closer link with client relationship and thereby it was felt time deadline pressure is more difficult to cope with than time budgets due to its association with external pressure of clients.

4.5 Client acquisitions

To obtain a better understanding if auditors were pressurized towards acquiring new clients by the performance measurement system, they were specifically questioned on the importance of client acquisitions for their performance evaluation. The importance of client acquisitions is considered as a factor which can contribute to a promotion towards the partnership. One auditor stated is as following:

‘For your promotion towards the level of partner it is considered as one of the important factors (A2). Furthermore, being commercial active is considered as part of the job of a (senior) manager in an audit firm. We are a commercial business, acquiring clients is part of the job (A4)’.

When specifically questioned on what are opportunities to acquire new clients, no specific associations with audit quality threatening behaviour were mentioned. For example, the deletion of audit steps was not referred to by the auditors. In addition, the auditors stated that their firm implemented a new strategy to acquire new clients:

‘The recently implemented strategy was introduced to compete and differentiate on delivering high audit quality instead of reducing their price propositions (A6).’

Furthermore whereas client acquisitions was considered as an factor which can contribute to their performance evaluation, the overall impact of client acquisitions for the performance evaluation of (senior) managers was considered to have fallen. Several reasons

were referred to by the auditors as reasons for this decreased importance. Although, auditors referred to the importance of client acquisitions are essential at times. But it is currently considered as less essential. A shift of the decreased importance of client acquisitions during the performance evaluations was felt by a majority of the auditors. One auditor gave the following example:

‘Earlier in the days, if an auditor who was excellent technical skilled, but had an absence of commercial capabilities. Then there were not much further prospects for the auditor to stay in the audit firm. Luckily, these days are over (A10).’ Delivering high audit quality has become much more important than the acquisitions of clients (A9)’.

Another explanation of the decreased importance of client acquisitions for the performance evaluations of auditors is due to the increased importance of audit quality. The findings suggest that client acquisitions is still an important factor during the performance evaluations of auditors. However, the impact of this factor during the performance evaluations is considered as decreased by the auditors. There was a large consensus that the importance of client acquisitions was considered as being overshadowed by the importance of audit quality.

5 Discussion

5.1 Auditors individual compensation

It was expected that the individual compensation of auditors might pressurized the auditors towards profit maximization or striving to achieve high levels of audit quality. When pressurized towards profit maximization the auditors might engage in audit quality threatening behaviour. When pressurized towards high levels of audit quality, auditors would have no incentive to engage in audit quality threatening behaviour. The findings indicate that monetary compensation is a motivator for the auditors to conduct their work. This is in line with the study of Bonner and Sprinkle (2002), who argue that monetary incentives play a fundamental role in motivating and controlling the behaviour of auditors. The findings show that monetary compensation was a motivator for auditors however, it was not considered as an influence that pressurized auditors towards audit quality threatening behaviour. Due to the unclear compensation process and the marginal perceived salary increases and bonuses the potential monetary rewards were not considered as an incentive to engage in audit quality threatening behaviour. An explanation might be found in the study of Jansen et al. (2009). They found that Dutch firms are much less likely to provide their managers with variable incentive compensation contracts. And when Dutch firms make use of incentive compensation contracts, they are perceived as more complex. This might be an explanation why the process of salary increases and bonuses was considered as an unclear process and why the increases were perceived as limited. However, the participants of study of Jansen et al. (2009) were professionals in the Dutch automobile industry, whereas this study focusses on the audit firm industry. The findings might indicate that the monetary incentives like salary increases and bonuses were not powerful enough to pressurize auditors to engage in audit quality threatening behaviour. This is in line with the study of Rynes et al. (2005).

5.2 Time budget pressure

The results show contradictory findings with respect to the influence of time budget pressure on audit quality threatening behaviour. Whereas the majority of the auditors considered time budgets as not significant for their performance evaluation and thereby

suggesting it did not pressurize them towards audit quality threatening behaviour. This finding is contradictory to the research of Pierce and Sweeney (2004) which found that budgets still play a significant role in performance measurement systems. A potential explanation of this contradictory finding might be due to that time budgets were considered as an internal firm tool. Therefore, auditors might experience time budget pressure as more easily to cope with (Kelley et al., 2011). Another possible explanation why time budget pressure was perceived as less important is due to the staff shortages in today’s market. Due to staff shortages it was considered difficult to realize an appropriate team occupation. These inappropriate team occupations were considered to result in a decrease in efficiency during audit engagements. This might resulted in less emphasis on time budgets during the evaluations of auditors. However, some other auditors still considered time budgets as a pressure which could influence their performance evaluation. As a response these auditors engaged in audit quality threatening behaviour which could have consequences for the audit quality. Despite the decreasing importance for the performance evaluation of time budgets, time budget pressure is still considered by some auditors as a pressure for their performance evaluation. However, more than a substantial majority of the auditors argued that time budgets were not considered as an important element for their performance evaluation. This implies that the time budget pressure of audit firms not pressurizes auditors to engage in audit quality threatening behaviour.

5.3 Time deadline pressure

The findings shows that time deadline pressure is still considered as an important element for the performance evaluation of auditors. And as a response that auditors engaged in audit quality threatening behaviour. This is in line with the study of Pierce and Sweeney (2004), who argue that time deadline pressure is a significant explanator of audit quality threatening behaviour. On this aspect, the performance measurement system seems to pressurize auditors towards audit quality threatening behaviour. This could have severe consequences for the audit quality and thereby on audit firms. The justification for auditors to engage in audit quality threatening behaviour as a response to time deadline pressure seems poorly reasoned, even by the auditors themselves. Because auditors admitted they make use of the extra time to improve the audit file on other audit engagements. This dysfunctional behaviour might impact the audit quality. Another explanation of this audit quality threatening