Incentive contracts and time pressure on audit judgment performance

Abstract

Purpose

The purpose of this paper is to explore the effects of varying motivation induced by financial incentives and common uncertainty caused by time pressure on audit judgment performance.

Design/methodology/approach

The experimental method is used to examine how financial incentives and time pressure affect audit performance, based on predictions by both economic and behavioral theories. The relative performance contract and the profit sharing contract are two incentive schemes considered. To achieve the incentive effect on subjects when conducting the experiment, all subjects were compensated with real cash rewards, according to their incentive contracts as randomly assigned.

Findings

As predicted, major results show that both incentive contract and time pressure affect audit judgment performance. The audit performance is generally better under the relative performance contract than under the profit sharing contract. Additionally, it is demonstrated that an increase in the level of time pressure significantly improves recall, recognition, and total efficiency under both types of incentive contracts, but impairs recall and total performance, particularly under the relative performance contract. Moreover, the reduction of recall and total performance under the relative performance contract is significantly greater than under the profit sharing contract. Nevertheless, in this case, the relative performance contract still outperforms the profit sharing contract.

Research limitations/implications

The findings suggest the relative superiority of the relative performance contract in comparison with the profit sharing contract in improving auditors' judgment performance for structured tasks.

Practical implications

The relative performance contract would motivate junior auditors to exert more effort to increase their performance in the work environment of increased time pressure. The audit firms may incorporate relative performance evaluations into incentive schemes, to improve junior auditors' performance for structured tasks.

Originality/value

The paper is of value to audit firms in the design of performance‐contingent incentive contracts.

Citation

Lee, H. (2012), "Incentive contracts and time pressure on audit judgment performance", Managerial Auditing Journal, Vol. 27 No. 3, pp. 263-283. https://doi.org/10.1108/02686901211207492