Restoring Trust: How Audit Firms Are Changing Partner Incentives Under Public Scrutiny

Why It Matters  

Public trust in audit firms has been repeatedly tested, especially after financial crises and regulatory inspections exposed audit failures. A central question has emerged: do audit partners have the right incentives to prioritise audit quality?  New research evidence shows that audit firms have fundamentally reshaped how they evaluate, promote, and pay partners in response to public scrutiny on audit quality.  

Key Takeaways  

· Audit firms have strengthened performance evaluation systems to prioritise audit quality and align with societal expectations.  

· Career progression and job security for audit partners increasingly depend on delivering high-quality audits.  

· Compensation models are shifting towards long-term performance and introducing financial penalties for poor audit quality.  

Rising Scrutiny in Reshaping Audit Firm Policies  

Over the past two decades, audit firms worldwide have faced growing scrutiny from regulators and the public following high-profile corporate failures and concerns about audit quality. In the Netherlands, inspections and public debate culminated in legislative reform requiring audit firms to align partner incentives with audit quality objectives.  

This study first analyses internal policy documents from the eight largest audit firms in the Netherlands between 2007 and 2017, to examine changes across three interconnected areas of performance management:  

· Performance measurement  

· Career development  

· Compensation  

The study finds that audit firms have made significant policy changes to introduce more structured, detailed systems to evaluate partner performance, particularly in terms of audit quality.  

In 2007, audit quality was often described in general terms and carried limited measurable weight in overall evaluations. Some relied on broad, qualitative assessments; others lacked formal performance systems altogether. By 2017, all firms had developed more refined measures for audit quality and more structured performance management systems. Audit quality was measured more granularly and objectively. Importantly, audit  

quality has become more influential relative to other performance factors. Some firms significantly increased the weighting of quality measures in overall performance ratings. In several cases, failing to meet minimum quality standards automatically prevented partners from receiving high overall performance ratings, regardless of success in other areas.  

From Policy Changes to Real Consequences  

Changing policy documents is one thing; changing behaviour is another. Audit partnerships are complex organisations: partners are both owners and employees, making performance management politically sensitive and difficult to reform. Resistance to change is likely when compensation and promotion structures are at stake. Therefore, the study subsequently examines proprietary records of individual partners to test whether these policy changes translated into real consequences in practice.  

The evidence shows that they did.  

Audit firms were not merely symbolically responsive to regulatory pressure on papers. They implemented substantive changes in practice that altered how partners are evaluated, promoted, and paid.  

Over time, audit quality became increasingly consequential for career development and reshaped professional trajectories. Partners with subpar quality performance faced a higher probability of demotion or dismissal. At the same time, firms adjusted their profit-sharing systems. By 2017, all eight firms had implemented explicit quality-related penalties, ranging from reductions in profit-sharing units to direct cash deductions. Some also introduced clawback mechanisms to recover compensation in cases of later-discovered audit failures.  

Importantly, the link between short-term performance and annual profit sharing weakened over time. Instead, firms increasingly reward sustainable performance. This shift reduces pressure for short-term financial metrics and supports a more long-term focus on audit quality. In doing so, firms strengthened the alignment between partner incentives and societal expectations of audit quality.  

Business Implications  

This research study highlights how audit firms can redesign incentive systems to balance financial performance with ethical and quality objectives.  

· For audit firms: Strengthening performance measurement and linking rewards to quality outcomes can improve accountability and reinforce professional standards.  

· For regulators: Principles-based regulation can be effective when coupled with sustained scrutiny. Firms appear capable of meaningful organisational reform with the right individual incentives.  

· For corporate leaders: Understanding how audit firms incentivise partners may help in selecting auditors that prioritise long-term reliability and risk management.  

More broadly, the study demonstrates that performance management systems play a crucial role in shaping the audit profession. By shifting incentives from short-term financial rewards to long-term quality outcomes, firms can align partner behaviour with stakeholder expectations to restore societal trust.  

Authors & Sources  

Authors: Olof Bik (University of Groningen), Jan Bouwens (University of Amsterdam), W. Robert Knechel (University of Florida), and Yuxia Zou (Nanyang Technological University). 

 Original Article: The Accounting Review