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

Fouad Ben Abdelaziz (), Souhir Neifar and Khamoussi Halioui
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Fouad Ben Abdelaziz: NEOMA Business School
Souhir Neifar: University of Sfax
Khamoussi Halioui: University of Sfax

Annals of Operations Research, 2022, vol. 311, issue 2, No 3, 587-610

Abstract: 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.

Keywords: Multilevel programming; Auditing; Agency theory (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10479-020-03748-9

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