Auditor compensation and accounting firm performance

Purpose Audit firms have a strong historical tradition of professionalism, but they are also commercial entities. This study aims to investigate the relationship between auditor cash compensation and office-level financial performance. Design/methodology/approach This study uses proprietary compensation expense and financial performance data from audit offices in China. Using the ordinary least squares regressions, this study tests the association between per capita compensation and office-level financial outcomes. Findings This study provides evidence that audit offices offering higher compensation achieve more profitable performance, as reflected in increased market share, higher return on assets and greater operating profit margins. Mechanism tests suggest that reductions in auditor turnover, driven by compensation incentives, partially account for this performance improvement. Additional tests show that the benefits of compensation incentives are particularly pronounced in audit firms licensed to conduct listed firm audits or when accompanied by staff training and technical development. Furthermore, both partner-level and staff auditor compensation significantly enhance office-level financial performance. The results might be of interest to both practitioners and regulatory bodies. Originality/value To the best of the authors’ knowledge, this study is the first to examine the relationship between auditor cash compensation and audit-office profitability. The findings highlight important policy implications for audit firms seeking to retain high-caliber auditors and maximize their economic benefits through human capital investments, including compensation, education, training and technical development.