Incentive contracts and time pressure on audit judgment performance

Abstract

This study is to explore the effects of varying motivation induced by financial incentives and common uncertainty caused by time pressure on audit performance. We use the experimental method to examine how financial incentives and time pressure affect audit performance. Two incentive schemes considered are the relative performance contract and the profit sharing contract. To achieve the incentive effect on subjects in conducting the experiment, we truly compensate all subjects with cash reward according to their incentive contracts. As predicted, major results show that, audit performance is significantly 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 audit efficiency but impairs audit performance under both types of contract. Moreover, the reduction of audit 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. The results suggest the relative usefulness of the relative performance contract in comparison with the profit sharing contract in improving audit performance. The study adds value to the auditing firms in the design of performance-contingent incentive contract.