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The use of non-financial performance measures in CEO compensation contracts and pricing of audit engagements: Evidence from the amendment to PCAOB AS 2110

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  • Kwon, Kyungeun Karry
  • Park, Myung Seok

Abstract

In June 2014, the Public Company Accounting Oversight Board amended Auditing Standard No. 12, requiring auditors to obtain an understanding of a firm's financial relationships and transactions with its executive officers, including executive compensation. This study examines whether, following the amendment, auditors view the use of non-financial performance measures (NFPMs) in CEO compensation contracts as relevant to their risk assessments and whether this perspective influences audit pricing. Using hand-collected data on NFPMs from proxy statements, we find that auditors charge significantly lower fees to clients that include NFPMs in CEO compensation contracts in the post-amendment period. Additionally, we document a notable decline in audit fees when clients adopt NFPM-based compensation after the amendment. These findings suggest auditors responded to the revised standard by treating NFPMs in CEO compensation as a risk-mitigating factor and adjusting audit pricing accordingly.

Suggested Citation

  • Kwon, Kyungeun Karry & Park, Myung Seok, 2025. "The use of non-financial performance measures in CEO compensation contracts and pricing of audit engagements: Evidence from the amendment to PCAOB AS 2110," Advances in accounting, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:advacc:v:69:y:2025:i:c:s0882611025000410
    DOI: 10.1016/j.adiac.2025.100846
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    Keywords

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    JEL classification:

    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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