Ownership Stakes and Remuneration in Merged Audit Firms

Document Type : Original Article


1 Ph.D. Student in Accounting, Central Tehran Branch, Islamic Azad University, Tehran, Iran

2 Assistant Professor, Department of Accounting, Faculty of Finance, Kharazmi University, Tehran, Iran


Little is known about the governance systems of audit firms, especially after mergers. Due to the failure of several audit firm mergers in Iran, the present qualitative study addresses two challenging governance issues: determining ownership stakes and allocating profits and benefits between partners of merged audit firms. Content analysis of in-depth interviews with 28 partners from several merged audit firms revealed that when the merging firms have similar conditions, ownership stakes are divided equally; otherwise, the larger acquiring firm receives a larger percentage. At the individual partner level, the most commonly implemented method is to divide the shares of the merged firm according to the percentage of shares held by each partner in the pre-merger firms. Other approaches include: a comprehensive model, equal distribution of new stakes, more stakes for acquiring firm's partners, and assigning the majority of shares to a select group of main partners (senior and founding) based on their decision. Six firms shared profits by ownership stakes, three used a hybrid approach (performance and ownership), and two used stakes for principals and fixed salaries for non-principals. The results of this research, which sheds light on the governance system of merged audit firms and the interests of partners, have important implications for both audit firms and professional supervisory bodies. Specifically, these findings can help to create and maintain the motivation of audit partners in professional partnerships, ultimately contributing to the success of the merger in practice.


Main Subjects

آقایی قهی، علیرضا، یزدانی، شهره و خان‌محمدی، محمد حامد. (1399). تبین عوامل مؤثر بر اندازة مؤسسات حسابرسی جامعه حسابداران رسمی ایران. پژوهش‌های حسابرسی حرفه‌ای. 1(1)،90-113
ترکانی، شهلا، محمدرضایی، فخرالدین و یعقوب‌نژاد، احمد. (1400). نوع ادغام مؤسسات حسابرسی در ایران: شکلی یا واقعی. دانش حسابرسی .21(84)، 349-381.
رحمانی علی، محمدی اروجه فایزه. (1390). بررسی موانع تشکیل مؤسسات بزرگ در ایران. دانش حسابرسی. 11(45)،82-103
کیهانی، حمیدرضا. (1399). ادغام مؤسسات حسابرسی کی؟ چگونه؟ چرا؟ و موانع آن. فصلنامه حسابدار رسمی. شماره 50.
محامی، ناصر. (1395). ضرورت ادغام مؤسسات حسابرسی، دنیای اقتصاد. 23 آبان‌ماه.
محمدرضایی، فخرالدین، فرجی، امید و فتاحی دولت‌آبادی، فروزان. (1401). ادغام موسسات حسابرسی و تأخیر در گزارش حسابرسی: بررسی استدلال های متناقض. پیشرفت‌های حسابداری.14(1)،277-310.
Abowd, J. M. )1990(. Does performance-based managerial compensation affect corporate performance? Industrial and Labor Relations Review 43 (3): 52–73. Accounting, Business and Finance Journal, 6 (3): 65–84.
Aghaei,Q.A., Yazdani, S. and Khanmohammadi, M.H. (2021). Explaining the Effective Factors on the Size of the Audit Institutions of the Iranian Association ofCertified Public Accountants.Journal of Professional Auditing Research. 1(1), 90-113 (In Presian).
Ai, X., Doucet, A., Myers, L. A., & Schmardebeck, R. (2022). Common Auditors in Mergers and Acquisitions: The Impact on Post-Acquisition Financial Reporting Quality and Audit Fees. Available at SSRN 3589811.
Aksu, M and Demir Kan, S. (2018.) Engagement partner attributes and audit quality: Does the partner’s ownership stake matter? https://dx.doi.org/10.2139/ssrn.3300770.
Ashkanasy, N. M., and Holmes, S. (1995). “Perceptions of Organizational Ideology Following Merger: A Longitudinal Study of Merging Accounting Firms.” Accounting, Organizations and Society, 20/1: 19–34.
Australian Securities and Investments Commission (ASIC). (2014). Report 397: Audit inspection program report for 2012–13. Available at: http://download.asic.gov.au/media/1344614/rep397-published-27-June-2014.pdf (Accessed 25 January 2015).
Bills, K. L., C. Hayne, and S. E. Stein. )2018(. A field study on small accounting firm membership in associations and networks: Implications for audit quality. The Accounting Review.(forthcoming). https://doi.org/10.2308/accr-52003.
Burke, J. J., Hoitash, R., Hoitash, U., Xiao, S. (2021). The costs and benefits of retirement poli-cies at U.S. audit firms. Journal of Accounting and Public Policy, forthcoming.
Burrows, G., and C. Black. )1998(. Profit sharing in Australian Big 6 accounting firms: An exploratory study. Accounting, Organizations and Society 23 (5): 517–530.
Carter, C., and Spence, C. (2014). Being a successful professional: An exploration of who makes partner in the Big 4. Contemporary Accounting Research, 31(4), 949-981.
Choi, J. H., Kim, S., and Raman, K. K. (2017). Did the 1998 merger of Price Waterhouse and Coopers & Lybrand increase audit quality? Contemporary Accounting Research, 34(2), 1071-1102.
Christensen, B., Smith, K. W., Wang, D., & Williams, D. (2023). The audit quality effects of small audit firm mergers in the United States. Auditing: A Journal of Practice & Theory.
Coram, P. J., and Robinson. M. J. (2017). Professionalism and Performance Incentives in Accounting Firms. Accounting Horizons, 31(1): 103-123.
Creswell, J. )2003(. Research Design. Thousand Oaks, CA: Sage.
Creswell, J. )2005(. Educational Research. Upper Saddle River, NJ: Pearson.
DeFond, M., and J. Francis.( 2005). Audit research after Sarbanes-Oxley. Auditing:A Journal of Practice and Theory 24 (Supplement): 5–30.
DeFond, M., and J. Zhang. )2014(. A review of archival auditing research. Journal of Accounting and Economics 58(2–3):275-326.
Deumes, R., Schelleman, C., Bauwhede, H.V., and Vanstraelen, A. (2012), “Audit firm governance: Do transparency reports reveal audit quality?”, Auditing: A Journal of Practice and Theory, 31 (4), 193-214.
Ding, R., and Jia, Y. (2012). Auditor mergers, audit quality and audit fees: Evidence from the PricewaterhouseCoopers merger in the UK. Journal of Accounting and Public Policy, 31(1), 69-85.
Downar, B., Ernstberger, J., and Koch, C. (2020) Who makes partner in Big 4 audit firms? - Evidence from Germany. Accounting, Organizations and Society,91, 101176.
Ehlinger, A. (2010). Determinants of the Extent of Disclosure in Transparency Reports According to Article 40 of the 8th Company Law Directive: First Evidence from Austria, Germany and the Netherlands. The Maastricht Accounting, Auditing & Information Management Research Center, pp. 46-72.
Empson, L. (2000). Mergers between professional service firms: Exploring an undirected process of integration. In C. Cooper, &A. Gregory (Eds.), Advances in mergers & acquisitions (Vol. 1, pp. 205–237). New York: JAI Press.
Empson, L. (2012). Beyond dichotomies: A multi-stage model of governance in professional service firms. In M. Reihlen, & A.Werr (Eds.), Handbook of research on entrepreneurship in professional service firms (pp. 274–295). Cheltenham, United Kingdom: Edgar Elgar.
Empson, L. and Chapman, C. (2006). ‘Partnership versus corporation: Implications of alternative forms of governance in professional service firms. Research in the Sociology of Organizations, 24, 145-176.
European Commission (EC). (2010). Audit policy: Lessons from the crisis. Available at: http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM: 2010:0561: FIN: EN:PDF (Accessed 25 January 2015).
Fairclough, N. C. and Fairclough, S. (2012). The Oxford handbook of mergers and acquisitions (pp.593-618), Chapter: 24, Oxford University Press, Editors: David Faulkner, Satu Teerikangas, Richard J. Joseph.
Fontaine, R., Letaifa, B.S., and Herda, D. (2013). An Interview Study to Understand the Reasons Clients Change Audit Firms and the Client’s Perceived Value of the Audit Service. Current Issues in Auditing,7(1),1-14.
Francis, J. R.( 2011). A framework for understanding and researching audit quality. Auditing: A Journal of Practice & Theory 30 (2): 125–152.
Fu, Y., (2015), Transparency Reporting and Partner Remuneration in Australian Audit Firms, Master Thesis, The University of New South Wales, Australia.
Galanter, M., and Henderson, W. (2008). The elastic tournament: A second transformation of the big law firm. Stanford Law Review, 60(6), 1867-1929.
Greenwood, R. and Empson. L. (2003). The professional partnership: Relic or exemplary form of governance? Organization Studies, 24(6), 909-933.
Greenwood, R., Hinings, C.R. and Brown, J. (1994). Merging professional service firms. Organization Science, 5 (2), 237-259.
Harlacher, D., and Reihlen, M. (2014). Governance of professional service firms: A configuration approach. Business Research, 7,125–160. Doi: 10.1007/s40685-014-0006-8.
He, X., Kothari, S.P.; Xiao; T., and Zuo, L. (2022). Industry-Specific Knowledge Transfer in Audit Firms: Evidence from Audit Firm Mergers in China. The Accounting Review. 97(3):249-277.
Holmes, S., and I. Zimmer. 1998. The structure of profit sharing schemes in accounting partnerships. Accounting and Finance 38(1):51-70.
Huddart, S. (2013). Discussion of empirical evidence on the implicit determinants of compensation in Big 4 audit partnerships. Journal of Accounting Research, 51(2),389-397.
International Organization of Securities Commissions (IOSCO). (2009).Transparency of Firms That Audit Public Companies.Consultation Report. Available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD302.pdf
Kenno, S. A., S. A. McCracken, and S. E. Salterio. )2017(. Financial reporting interview-based research: a field research primer with an illustrative example. Behavioral Research in Accounting ,29 (1): 77-102.
Keyhani, H. (2020). Audit firm mergers: Where? How? Why? And its barriers. Journal of Cerfied Accountnants. 50. 27-31.(In Persian)
Kitto, A. R. (2023). The effects of non-Big 4 mergers on audit efficiency and audit market competition. Journal of Accounting and Economics, 101618.
Knechel, W., Niemi, L., and Zerni, M. (2013b). Empirical evidence on the implicit determinants of compensation in Big 4 audit partnerships. Journal of Accounting Research, 51(2), 349–387.
Kumar, P. & Zattoni, A. (2014). Corporate governance, information, and investor confidence, Corporate Governance: An International Review, 6: 437–439.
Lennox, C., Wang, C., and Wu, X. (2020). Opening up the ‘Black Box’ of Audit Firms: The Effects of Audit Partner Ownership on Audit Adjustments. Journal of Accounting Research, 58(5), 1299-1341
Mahami,N.(2016). Necessity of integration of auditing institutions, the world of economics. November 14. (In Persian)
Mallin, C. (2002). The relationship between corporate governance, transparency and financial disclosure, Corporate Governance: An International Review, 10: 253–255.
Mellon, E. )1995(. Governance. In N. Nicholson (Ed.), The Blackwell encyclopaedic dictionary of organizational behaviour (Blackwell encyclopaedia of management). Oxford: Wiley Blackwell.
Miles, M. B., A. M. Huberman, and J. Saldana. (2014(. Qualitative data analysis: a methods sourcebook. Thousand Oaks, CA: SAGE Publications, Inc.
Mohammad Rezaei, F. and Mohd-Saleh, N., (2018). Audit report lag: the role of auditor type and increased competition in the audit market. Accounting and Finance, 58, 885–920.
Mohammadrezaei, F., Faraji, O.and Fatahi Dolatabadi,F. (2022). Audit Firms’ Mergers and Audit Report Lag: Examining Contradictory Arguments,Journal of Accounting Advances.14(1), 277-310(In Persian)
O’Dwyer, J. N. (1995). Managing law firm mergers. Unpublished PHd Thesis, Western Business School—University of Western Ontario. of the big law firm’. Stanford Law Review, 60, 102-164.professional service firm. Paper presented at the Annual Meeting of the Academy of Management.
OECD. (2015). G20/OECD Principles of Corporate Governance. Paris: OECD.
Public Company Accounting Oversight Board (PCAOB). (2009(. Auditing Standard No. 7 -Engagement Quality Review and Conforming Amendment to the Board’s Interim Quality Control Standards. (Release No. 2009-004). July 28. Washington, D.C.: PCAOB.
Public Company Accounting Oversight Board (PCAOB). (2011). Improving the Transparency of Audits: Proposed Amendments to PCAOB Auditing Standards and Form 2. PCAOB Release No. 2011- 007. Washington, D.C.: PCAOB. Retrieved from http://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB_Release_2011-007.pdf
Rahmani,A and Mohammadi, O.F.(2011). Examining the obstacles to the establishment of large institutions in Iran. Journal of Audit Scinence. 11(45), 82-103 (In Persian)
Rosa, F. L., Caserio, C., and  Bernini, F., (2018). Corporate governance of audit firms: Assessing the usefulness of transparency reports in a Europe wide analysis. Corporate Governance: An International Review, 27 (1), 14-32.
Sinkin, J, and Putney, T, (2009). Succession Planning: The Availabe Stratgies and How They Work.CPA Prac.Mgmt.f.,5,5.
Torkani, S., MohammadRezaei, F., and Yaghoubnezhad, A. (2021). Types of Audit firm mergers in Iran: Substantive vs. Symbolic, Journal of Audit Scinence, 21 (84), 349-381. (In Presian)
United States Securities and Exchange Commission (SEC). (2002). Sarbanes-Oxley Act Section 201(a). Available at: http://www.sec.gov/rules/final/33-8183.htm (accessed 25 January 2015).
Vandenhaute ,M.L., and Hardies, K.(2022).Equity Incentives and Audit Partner Reporting Decisions for Private Company Audits (Working paper). https://doi.org/10.2139/ssrn.4136402.
Waldman, M. (1990). Up-or-out contracts: A signaling perspective. Journal of Labor Economics, 8(2), 230e250. https://doi.org/10.1086/298221
Westermann, K. D., J. C. Bedard, and C. E. Earley. 2015(. Learning the “craft” of auditing: a dynamic view of auditors’ on the job learning. Contemporary Accounting Research ,32(3): 864-896.
Westermann, K. D., J. R. Cohen, and G. Trompeter. )2018(. PCAOB inspections: Public accounting firms on “trial”. Contemporary Accounting Research. Forthcoming. Online early at https://doi.org/10.1111/1911-3846.12454.
Wootton C.W., C.M. Wolk, and C. Normand. (2003). An Historical Perspective on Mergers and Acquisitions by Major US Accounting Firms. Accounting History, 8(1),25-60.