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Multilevel optimal managerial incentives and audit fees to limit earnings management practices

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Abstract

The main objective of this study is to design an optimal managerial compensation scheme and optimal auditor fees to counter income-increasing earnings management behavior. This study draws on game theory with three players: the shareholders, managers and auditors. It considers the possibility of collusion between the manager and auditor and analyzes the different scenarios that may exist between the three players. The results of our study prove that it is possible to establish an optimal managerial compensation contract and optimal auditor fees which will limit earnings management manipulation and guarantee high audit quality. We found that the optimal managerial compensation scheme depends on the firm situation. Moreover, we illustrated how the auditor is motivated by improving audit effort in all possible scenarios. This paper can be considered a tentative effort to provide systematic evidence for designing optimal contracts that align divergent interests between managers and shareholders.

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Authors and Affiliations

  1. NEOMA Business School, Rouen, France

    Fouad Ben Abdelaziz

  2. The Faculty of Economics and Management of Sfax (FSEG-Sfax), University of Sfax, Sfax, Tunisia

    Souhir Neifar

  3. Higher School of Commerce of Sfax, University of Sfax, Sfax, Tunisia

    Khamoussi Halioui

Authors
  1. Fouad Ben Abdelaziz
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  2. Souhir Neifar
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  3. Khamoussi Halioui
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Correspondence to Fouad Ben Abdelaziz.

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Ben Abdelaziz, F., Neifar, S. & Halioui, K. Multilevel optimal managerial incentives and audit fees to limit earnings management practices. Ann Oper Res 311, 587–610 (2022). https://doi.org/10.1007/s10479-020-03748-9

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  • DOI: https://doi.org/10.1007/s10479-020-03748-9

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