Performance Evaluations in Audit Firms: Evaluation Foci and Dysfunctional Behaviour

• Author: Thomas Riise Johansen,Jeppe Christoffersen
• DOI: http://doi.org/10.1111/ijau.12079
• Published date: 01 March 2017
• Date: 01 March 2017

Performance Evaluations in Audit Firms: Evaluation Foci and

Dysfunctional Behaviour

Thomas Riise Johansen and Jeppe Christoffersen

Department of Accounting and Auditing, CopenhagenBusiness School, Denmark

Previous research has only minimallyexamined the association between the behaviour and performance evaluations

of individual auditors beyond the use of efficiency‐focused evaluations. We examine the association between

dysfunctional auditor behaviour and three evaluation foci: an efficiency focus, a client focus and a quality focus.

Our results, which are based on questionnaire responses from 196 auditors, demonstrate that an efficiency focus is

not associated with dysfunctional behaviour. A client focus is found to be associated with dysfunctional behaviour.

Finally, and perhaps most importantly, our results show that it seems possible to limit dysfunctional behaviours

through a qualityfocus in performance evaluations. Our resultsprovide insights of use to practitioners andregulators

on how performance evaluations may not only induce but also reduce dysfunctional auditor behaviours.

Key words: Audit firms, performance evaluation, dysfunctional behaviour

INTRODUCTION

Audit firms and their auditors have public interest

obligations pertaining to mandatory audits but are also

private firms with commercial objectives, which instils a

potential conflict between professional and commercial

commitments (Zeff, 2003a, 2003b; Wyatt, 2004; Samuel,

Covaleski & Dirsmith, 2009; Suddaby, Gendron & Lam,

2009; Carringtonet al., 2013). This delicate balance between

commercialism and professionalism presents significant

challenges for audit firms with regard to performance

evaluation design.

Another challenge concerns how performance is

measured. Audit firms have an interest in the efficient

management of resources (staff) and therefore various

measures of cost/effectivenessare prevalent in audit firms

(Anderson‐Gough, Grey & Robson, 2001). Following

the coexistence of both professional and commercial

commitments, auditfirms also have interests in measuring

performance along these dimensions. Professional

performance may be understood as contributions to audit

quality, but quality is difficult to measure as audits are

credence goods –i.e. goods for which quality is difficult

or extremelycostly to observe, even after delivery (Knechel

et al., 2013a). Commercial performance may be measured

based on revenue contributions, but may also be more

broadly related to client relationships. This implies that

performance evaluations are likely to accommodate both

quantitative and financial measures, included in formal

evaluation systems, and more qualitative measures that

may be perceived structurally or socially by auditors.

It is arguably unsurprising that concerns have been

raised with regard to incentives oriented towards

commercial objectives (Zeff, 2003b), and calls have been

made for performance evaluation to address professional

values (IFIAR, 2015). Thus, measures in auditor

performance evaluation lead to auditor incentives that

may induce or reduce risks of behaviours in conflict with

professional standards (Zeff, 2003b; Knechel et al., 2013a).

Such behaviours may be referred to as dysfunctional in the

sense that they increasethe risks of issuance of an incorrect

audit opinion or of other flawed outcomes of audit

engagements.

Previous research suggests that particular ways of

evaluatingthe performance of individual auditorsproduce

perverse auditor incentives that may fuel their

dysfunctional behaviours (Otley & Pierce, 1995, 1996a,

1996b; Pierce & Sweeney, 2004; Beekes, Otley & Ururuka,

2014). However, the empirical findings are mixed

regarding the extent to which performance evaluations of

auditors are associated with dysfunctional behaviour.

Furthermore, previous research has focused only on the

effects of particular efficiency‐focused measures that may

promote dysfunctional behaviours and not on other

evaluation measures that may have similar effects or,

potentiallymore interesting, on measuresthat may actually

reduce dysfunctional behaviour.

To further refine and broaden knowledge on

performance evaluations presented in previous research,

we consulted previous studies to develop an

understanding of how performance evaluations may take

place (Otley& Pierce, 1996a, 1996b; Coram,Ng & Woodliff,

2004; Pierce & Sweeney, 2004; Huddart, 2013; Knechel,

Niemi & Zerni, 2013b; Pruijssers, Van Oosterhout &

Heugens, 2013; Beekeset al., 2014). However,the academic

literature,in concentrating almost entirely on the efficiency

focus, has not provideda comprehensive understandingof

actual performance evaluation foci used in audit firms.

Consequently, we were not able to construct measures

of performance evaluation foci based entirely on the

academic literature. Therefore, we engaged with a group

of approximately 100 practitioners to deepen this

understanding.

The practitioners, who were experienced staff auditors

and managers participating in a course on research

methods in accounting, were asked to discuss which

measures they (or their colleagues) found of importance

in formal or informal performance evaluations performed

by their superiors. From these efforts, we collected a gross

list of measures that individual auditors may encounter

to varyingextents in actual performance evaluations.These

measuresincluded specific metrics (e.g.the share of billable

hours) and more subjective measures (e.g. customer

evaluations). Our qualitative analysis of similarities

between these measures, supported by confirmatory factor

analyses (see the method section for further information),

Correspondence to: Thomas Riise Johansen, Department of Accounting

and Auditing, Copenhagen Business School, Solbjerg Plads 3, 2000

Frederiksberg, Denmark.Email: trj.acc@cbs.dk

International Journal of Auditing doi: 10.1111/ijau.12079

Int. J. Audit. 21:24–37 (2017)

© 2016 John Wiley& Sons Ltd ISSN 1090-6738