GAVIN HINKS

Logic would suggest that if you want better audits, give auditors a bonus for high-quality work – a pay incentive is bound to work. But that’s not quite what researchers found when they looked at the way bonuses affect auditors.

What they unearthed was a complex picture in which some auditors up their game when offered a bonus, while others, notably Big Four auditors (Deloitte, EY, KPMG and PwC), see their work undermined. Coming at a time of intense focus on audit quality, the findings may have big implications for the way firms understand how to motivate and incentivise auditors.

Dutch experiment

Academics Herman van Brenk and Barbara Majoor of the Nyenrode Business University in the Netherlands came to their conclusions after conducting an experiment involving 420 Dutch audit professionals ranging from those described as "audit staff" to "audit managers."

The experiment asked them to consider a PLC company in need of a €3 million accounting adjustment and which of five additional audit procedures they would carry out considering performance materiality for the organisation is €4.8 million.

An expert panel was convened to score the participants on the quality of their audit plans based on a scale of one (not very effective) to seven (very effective).

The scenario was further modified by either including, or excluding, the offer of a bonus and by modifying external pressures, such as budget constraints or regulatory pressure for quality.

The researchers call this "cost-quality" pressure.

Participants were also categorised by three types of motivation: intrinsic drive, reward responsiveness and fun seeking.

The experiment’s findings may surprise those who assume monetary incentives are an easy route to higher-quality work. Bonuses increased the quality of work from auditors with "lower" intrinsic drive levels, but decreased the quality of work from auditors with higher levels of intrinsic drive. Bonuses seemed to make no difference to auditors motivated by "reward responsiveness" or "fun seeking" impulses.

In an audit with high cost-quality pressures, bonuses make little difference to auditors with any of the three forms of motivation. However, bonuses seemed to stimulate "audit managers" while undermining the work of "audit staff."

Impact on Big Four

But the headline news is the effect bonuses may have on Big Four auditors. The researchers found that the "effects of an audit quality bonus are weaker for Big Four participants than for non-Big Four participants."

Bonuses have become an increasing feature of audit work and the search for higher-quality audits. Van Brenk and Majoor report that the Big Four have been using bonuses for non-partner employees since 2015. They say even regulators have emphasised that an audit firm’s compensation plan is a signal of their "commitment" to audit quality.

And quality has been a concern of policy makers and regulators alike. The latest research findings come as the UK awaits major reforms of the audit sector following several high-pro