FAIRNESS-AUDIT CONTRACT DESIGN: REVENUE-LINKED FEES AND REPORTED BIAS LEVELS

Abstract

This paper investigates how fairness-audit contracts can be designed in a setting of revenue-based charges and how it affects the reported level of bias in the results of an audit. Namely, it examines the influence that integrating compensation metrics with performance figures, e.g., revenues, has on the propensity of auditors to report biased findings. It is aimed at pointing to the importance of the audit contract fairness mechanism in terms of the quality and honesty of the business reporting. It considered a quantitative field study, where 150 auditors in large auditing firms participated, and a random sampling approach was used to obtain the respondents. Such auditors were assigned varying contract terms, namely, revenue-based fee structure and their degree of bias in the audit reports was measured on performance-based activities. The regression analysis was utilized as the tool to determine the effects of revenue-based fees on the biasness of the auditing outcomes. The findings showed that larger fees based on revenue were linked to more biasness in the audit reported results especially where there was excess paying of compensation based on performance results. The reported biases and the associated higher level of fees were interacted and significant (p < 0.05). Performance based contracts are also likely to bring about biasness in the audit reports and this paper therefore recommends the development of regulatory frameworks to deal with the biasness in order to maintain certain degree of fairness in the audit processes.