Seminar: Jorien Pruijssers, Erasmus University Rotterdam

Winner at a Losing Game? How Tournament-Type Promotion Systems Affect Auditor Behavior

Jorien Pruijssers
Erasmus University Rotterdam

Date: January 31, 2014
Time: 10:00 am - 11:30 am
Location: Room 310

Abstract: 

To internalize their critical dependence on human capital, accounting firms have been traditionally organized as professional partnerships in which ownership is in the hands of the partners. In order to select which auditor will become an owner, accounting firms rely on an up-or-out tournament-like promotion system as this promotion system contains powerful incentives to optimize efforts. Yet, these incentives are also known to trigger overly self-interested behaviors. This study investigates whether a tournament-like allocation of ownership in accounting firms promotes overly self-interested behaviors which threaten audit quality. Prior research on tournament-like promotion set-ups has identified two powerful design parameters that trigger these overly self-interested behaviors, namely the level of competition for a position as partner and the relative pay differences between salaried professionals and owners. Using survey research from Germany, the Netherlands, and Belgium, we find that the level of competition induces audit quality threatening behaviors while reducing desired professional skepticism. Contrary to expectations, the relative pay differences have no significant effect on quality threatening behaviors, but positively affect organizational citizenship behaviors. Overall, the results indicate that a tournament-like promotion system to ownership in accounting firms can trigger overly self-interested behaviors at the expense of overall audit quality.

For more information, please contact Darlene Fowler at: darlene.fowler [at] mcgill.ca.