Restoring Trust: How Audit Firms Are Changing Partner Incentives Under Public Scrutiny
Public trust in audit firms has been repeatedly tested, especially after financial crises and regulatory inspections exposed audit failures. These failures have raised a central question: do audit partners have the right incentives to prioritise audit quality? A study by Professor Yuxia Zou (Nanyang Technological University) and her co-authors examines how audit firms responded to public scrutiny of audit quality by reshaping how they evaluate, promote, and pay their partners. Drawing on internal policies and a decade of proprietary records from eight audit firms, the study offers a rare view of audit partners’ incentives through individual performance ratings, career progression, and compensation.
Rising Scrutiny in Reshaping Audit Firm Policies
Over the past two decades, audit firms worldwide have faced increasing pressure from regulators and the public following high-profile corporate failures and concerns about audit quality. In the Netherlands, this scrutiny led to new legal reforms requiring audit firms to align partner incentives with audit-quality objectives, aiming to create stronger incentives for partners to deliver high-quality audits.
The authors first analyse 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 and compensation. They find that audit firms have made significant policy changes to introduce more structured, detailed systems for evaluating partner performance, placing greater emphasis on audit quality.
Back in 2007, audit quality was not always clearly defined and carried limited measurable weight in overall evaluations. Some firms relied on broad, qualitative assessments; others lacked formal performance systems altogether. By 2017, this had changed significantly. All audit firms had developed more refined measures for audit quality and more structured performance management systems.
Notably, audit quality has become more influential relative to other performance factors, typically including clientele management, team development, and firm operations. 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, even if they performed well in other areas.
From Policy Changes to Real Consequences
Changing the rules in policy documents is one thing, but changing behaviour is another. Audit partnerships are complex organisations because partners are both owners of the firm and employees. This makes it difficult and politically sensitive to change how their performance is managed. Partners may also resist reforms when their compensation and chances of promotion are at stake. Therefore, the study then examines proprietary records of individual partners to test whether these policy changes translated into real consequences in practice.
The evidence shows that these reforms had real effects. Audit firms did more than simply comply with regulatory pressure on paper; they made substantive changes to how partners were evaluated, promoted, and paid. Over time, audit quality became increasingly important in partners’ career progression. Partners with subpar performance were at higher risk of demotion or dismissal.
Firms also adjusted their profit-sharing systems among partners. By 2017, all eight firms had implemented explicit quality-related penalties, ranging from reductions in profit-sharing units to direct cash deductions. Some firms went further by introducing clawback mechanisms, allowing them to recover compensation when audit failures were discovered later.
Importantly, the link between short-term performance and annual profit sharing weakened over time. Instead, firms increasingly reward sustainable performance. This shift reduces pressure on short-term financial metrics and supports a longer-term focus on audit quality. In doing so, firms strengthened the alignment between partner incentives and societal expectations of audit quality.
Business Implications
Overall, this study shows how audit firms, under heightened public scrutiny of audit quality, have redesigned their incentive systems to align individual partners’ compensation and career advancement more closely with quality objectives.
- For audit firms: Strengthening performance measurement and linking rewards or penalties 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.
Yuxia Zou is an Assistant Professor of Accounting at Nanyang Business School (NBS), Nanyang Technological University (NTU), Singapore. Her research lies at the intersection of financial and managerial accounting, with a focus on sustainability. Through quantitative empirical research, she examines how accounting systems, including internal management, external disclosure, and information assurance, contribute to more sustainable capital markets.
This research paper is a joint work with Olof Bik (University of Groningen), Jan Bouwens (University of Amsterdam), and W. Robert Knechel (University of Florida).