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Profit sharing in audit partnerships Liu, Xiaohong
Abstract
Academics call the problem that arises when individuals in a partnership take actions inconsistent with the partnership's collective interest the "moral hazard problem". This thesis examines how an audit partnership (i.e., partners as a whole) uses profit sharing rules to induce optimal partner behavior in performing various tasks, and thereby maximize the welfare of the partnership. The analysis is undertaken in different market structures: a competitive market and an oligopolistic market, which are intended to capture the different markets for the non-Big Five audit firms and the Big Five audit firms. Non-cooperative game theory is used to analyze the strategic interaction of partners within a partnership, as well as the strategic interaction of firms when the market is an oligopoly. In the oligopolistic market setting, it is assumed that clients are different in that the efficient audits of different types of clients require different effort profiles (i.e., different mix of auditors' effort-inputs); however, it is too costly, if not impossible, for an independent party like a court to verify each client's type, and thus client type cannot be used for partner compensation purposes. Under this assumption, I derive conditions under which there exists an equilibrium where audit firms strategically choose different profit sharing rules to specialize in different types of clients, and thereby earn positive economic profits. As a result of specialization, firms have different clienteles, and may provide audits of different quality and charge different audit fees for the same type of client. The analytical results help explain the observed differences in compensation plans among the Big Five audit firms, and provide insights into the differences in the audit services provided by the Big Five firms. This thesis also provides some empirical evidence consistent with the theory developed in this study.
Item Metadata
Title |
Profit sharing in audit partnerships
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Creator | |
Publisher |
University of British Columbia
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Date Issued |
2002
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Description |
Academics call the problem that arises when individuals in a partnership take actions
inconsistent with the partnership's collective interest the "moral hazard problem". This thesis
examines how an audit partnership (i.e., partners as a whole) uses profit sharing rules to
induce optimal partner behavior in performing various tasks, and thereby maximize the
welfare of the partnership.
The analysis is undertaken in different market structures: a competitive market and an
oligopolistic market, which are intended to capture the different markets for the non-Big Five
audit firms and the Big Five audit firms. Non-cooperative game theory is used to analyze the
strategic interaction of partners within a partnership, as well as the strategic interaction of
firms when the market is an oligopoly.
In the oligopolistic market setting, it is assumed that clients are different in that the
efficient audits of different types of clients require different effort profiles (i.e., different mix
of auditors' effort-inputs); however, it is too costly, if not impossible, for an independent party
like a court to verify each client's type, and thus client type cannot be used for partner
compensation purposes. Under this assumption, I derive conditions under which there exists
an equilibrium where audit firms strategically choose different profit sharing rules to
specialize in different types of clients, and thereby earn positive economic profits. As a result
of specialization, firms have different clienteles, and may provide audits of different quality
and charge different audit fees for the same type of client. The analytical results help explain
the observed differences in compensation plans among the Big Five audit firms, and provide
insights into the differences in the audit services provided by the Big Five firms. This thesis
also provides some empirical evidence consistent with the theory developed in this study.
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Extent |
6692036 bytes
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Genre | |
Type | |
File Format |
application/pdf
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Language |
eng
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Date Available |
2009-10-01
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Provider |
Vancouver : University of British Columbia Library
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Rights |
For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.
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DOI |
10.14288/1.0090637
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URI | |
Degree | |
Program | |
Affiliation | |
Degree Grantor |
University of British Columbia
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Graduation Date |
2002-11
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Campus | |
Scholarly Level |
Graduate
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Aggregated Source Repository |
DSpace
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Item Media
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Rights
For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.