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Article: Profit sharing in an auditing oligopoly

TitleProfit sharing in an auditing oligopoly
Authors
KeywordsAudit Partnership
Oligopoly
Profit-Sharing Rules
Specialization
Issue Date2005
PublisherAmerican Accounting Association. The Journal's web site is located at http://aaapubs.aip.org/accr/
Citation
Accounting Review, 2005, v. 80 n. 2, p. 677-702 How to Cite?
AbstractThis paper examines how partners in an audit firm can use profit-sharing rules to induce optimal partner behavior from the firm's point of view, taking into account the strategic competition of firms in an auditing oligopoly. We use a linear contracting framework to investigate the effects of profit-sharing rules on individual partners' various decisions, including their pricing strategies and effort choices. We assume that efficient audits of different types of clients require different effort profiles with respect to degree of partner cooperation. For example, the audit of a complex company requires different amounts of partner collaboration than does the audit of a simple company. Moreover, since it is too costly for an enforcement party, such as the head office of an audit firm or a court, to verify each client's type in order to resolve compensation disputes among the firm's partners, it is reasonable to assume that client type cannot be contracted upon for partner compensation purposes. Given this assumption, we derive conditions under which there exists an equilibrium in which audit firms strategically choose different profit-sharing rules to specialize in different types of clients, thereby earning positive economic profits. Our analysis provides insights into the strategic competition among the big audit firms, and helps to explain the observed differences in the compensation plans of these firms and in the nature of their client portfolios.
Persistent Identifierhttp://hdl.handle.net/10722/177941
ISSN
2015 Impact Factor: 1.953
2015 SCImago Journal Rankings: 4.478
References

 

DC FieldValueLanguage
dc.contributor.authorLiu, Xen_US
dc.contributor.authorSimunic, DAen_US
dc.date.accessioned2012-12-19T09:40:54Z-
dc.date.available2012-12-19T09:40:54Z-
dc.date.issued2005en_US
dc.identifier.citationAccounting Review, 2005, v. 80 n. 2, p. 677-702en_US
dc.identifier.issn0001-4826en_US
dc.identifier.urihttp://hdl.handle.net/10722/177941-
dc.description.abstractThis paper examines how partners in an audit firm can use profit-sharing rules to induce optimal partner behavior from the firm's point of view, taking into account the strategic competition of firms in an auditing oligopoly. We use a linear contracting framework to investigate the effects of profit-sharing rules on individual partners' various decisions, including their pricing strategies and effort choices. We assume that efficient audits of different types of clients require different effort profiles with respect to degree of partner cooperation. For example, the audit of a complex company requires different amounts of partner collaboration than does the audit of a simple company. Moreover, since it is too costly for an enforcement party, such as the head office of an audit firm or a court, to verify each client's type in order to resolve compensation disputes among the firm's partners, it is reasonable to assume that client type cannot be contracted upon for partner compensation purposes. Given this assumption, we derive conditions under which there exists an equilibrium in which audit firms strategically choose different profit-sharing rules to specialize in different types of clients, thereby earning positive economic profits. Our analysis provides insights into the strategic competition among the big audit firms, and helps to explain the observed differences in the compensation plans of these firms and in the nature of their client portfolios.en_US
dc.languageengen_US
dc.publisherAmerican Accounting Association. The Journal's web site is located at http://aaapubs.aip.org/accr/en_US
dc.relation.ispartofAccounting Reviewen_US
dc.subjectAudit Partnershipen_US
dc.subjectOligopolyen_US
dc.subjectProfit-Sharing Rulesen_US
dc.subjectSpecializationen_US
dc.titleProfit sharing in an auditing oligopolyen_US
dc.typeArticleen_US
dc.identifier.emailLiu, X: acliu@hku.hken_US
dc.identifier.authorityLiu, X=rp01079en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.2308/accr.2005.80.2.677-
dc.identifier.scopuseid_2-s2.0-18944389736en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-18944389736&selection=ref&src=s&origin=recordpageen_US
dc.identifier.volume80en_US
dc.identifier.issue2en_US
dc.identifier.spage677en_US
dc.identifier.epage702en_US
dc.publisher.placeUnited Statesen_US
dc.identifier.scopusauthoridLiu, X=8409667100en_US
dc.identifier.scopusauthoridSimunic, DA=8409667000en_US

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