Performance management
1/26/2018
Performance measurement
systems in auditing firms
Challenges and other behavioural aspects
Mohamed Hegazy
Department of Accounting,
The American University in Cairo, Cairo, Egypt, and
Myada Tawfik
Department of Accounting, Cairo University, Cairo, Egypt
Abstract
Purpose – The purpose of this paper is to investigate challenges facing auditing firms in designing
and measuring their performance and discusses why and how the balance scorecard (BSC) could
support the auditing firms overcome such challenges. The paper contributes to the existing literature
by identifying the peculiarity of the auditing firms in designing and implementing performance
measurement systems including the need for sound and advanced information systems, subjectivity
embedded in measuring customer satisfaction, growth and success of the firms and restrictions
imposed by regulations and auditing standards for the provision of non-audit services which may
increase the firms’ revenues and profits to help maintain high-quality outputs. Also, the paper provided
evidence for the use of non-financial measures in service industry in particular for customers and
finance. The unique dilemma in the auditing firms to provide services to satisfy customers yet
maintaining distance and independence from them represent an important research question requiring
investigation and study.
Design/methodology/approach – A review of the literature for performance evaluation in general
and in particular BSCs in service industries was made to identify challenges facing auditing firms
when measuring their performance. Data were collected using case study approach; two auditing firms,
one of the Big 4 and a medium size auditing firm with international affiliation operating in the
Egyptian market were selected. Interviews, document analysis and participant observations were used
in the analysis of each firm performance measurement system.
Findings – The paper suggests that major challenges face auditing firms in measuring their
performance mainly the size of the firm and its affiliation with international auditing firm, the
qualification and experience of partners and audit managers needed for the design and
implementation of a BSC or similar performance measures, the resources required for the
introduction of such performance measure and the peculiarity of the auditor and client relationship
with the need to maintain independence and confidentiality while providing high-quality services.
Although both auditing firms being studied have formal performance measurement systems,
they differ in their degree of comprehensiveness. In particular, the performance measurement system
of the larger firm is more elaborate than that of the smaller one and both place more emphasis
on qualitative measures such as learning and growth and internal business processes than
financial measures.
Research limitations/implications – Overall, the results have implications for understanding
the performance measurement process of auditing firms in general and in particular in an
emerging economy such as Egypt. The identification of the challenges facing auditing firms in
measuring their performance and how the implementation of BSC can help partners and
employees to overcome those challenges will add to the literature for performance evaluation in
service companies. Future research should be carried to compare and assess differences
between the behavioural aspects of performance measures in auditing firms and possible
application of BSC in such firms and those used in services industry. Also, the practicality of
implementing a BSC measures for different auditing firms should be investigated further in
future research.
Journal of Accounting in Emerging
Economies
Vol. 5 No. 4, 2015
pp. 395-423
©Emerald Group Publishing Limited
2042-1168
DOI 10.1108/JAEE-04-2012-0014
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2042-1168.htm
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Originality/value – The research among the first to investigate the challenges facing auditing firms
in designing and operating a performance measurement system and to discuss, using case studies, how
a BSC could support the auditing firms to overcome such challenges. Further, the research provides
insights into performance measures in auditing firms in developing economies like Egypt which are
sparse since most studies have been conducted in developed economies. Also, the paper enriches the
literature of performance measurement systems in service rather than the manufacturing sector
especially for medium and small size firms.
Keywords Performance measurement, Balanced scorecard, Auditing
Paper type Research paper
1. Introduction
Business scandals seem to be occurring more often in recent years across industries
stirring different questions and consequences yet one thing they share in common is
pointing to the auditor for blame. Just when the US economy was to recover from the
humiliations of Enron’s failure in 2001; the auditing profession received yet another blow
with the failure of Lehman Brothers. The classical response of the profession is the
tightening of standards around auditing firms to help them improve their performances
to uncover fraud. For example, in the USA, Congress itself intervened and issued
Sarbanes Oxley Act in 2002 following Enron’s failure (Arens et al., 2009).
If the aim is to enhance auditing firms’ performance then perhaps more attention
should be directed towards their inputs as well as the output they deliver. Nonetheless,
auditing standards are more concerned with the quality of audits produced by firms
rather than how they actually manage and control themselves. Despite the importance of
performance measurement, yet auditing standards give little attention to how firms
should be managed. According to professional auditing bodies, audit firms are successful
enough if they perform “quality” audit. For example, International Standards on Auditing
(ISA 220), adopted by several nations, require auditing firms to establish a system of
quality control providing reasonable assurance that firms and their personnel comply
with professional standards and regulatory requirements issuing an appropriate
audit report. Nonetheless, auditing firms are still in need of a system to measure its
own performance not just the quality of its “output”. Standards such as ISA220 are only
centred on the internal processes and the human resource management of employees
neglecting to incorporate amore robust and integrated performance measurement system
in such a competitive and dynamic environment.
The balanced scorecard (BSC) is a strategic performance measurement system
developed by Kaplan and Norton (1992). The BSC has attracted academic as well as
practitioners’ attention with the recent development of the organizational world.
Presentations in conferences and seminars, books publications including case studies
of BSC applications and software development for its use in business were the trend for
the last century (Sharman and Kavan, 1999). A survey undertaken in USA found that
60 per cent of the fortune 1,000 firms have implemented some models of the BSCs
(Malmi, 2001). The BSC aims at translating an organization’s strategy and mission
into a set of performance measurement indicators that the organization aims to achieve.
The BSC is also seen as containing outcome measures and the performance drivers
of outcomes, linked together in cause-and-effect relationships, and thus aims to
be a feed-forward control system (Norreklit, 2000). The BSC, therefore, is seen as both a
strategic measurement system as well as a strategic control system which can help
align departmental and personal goals to overall strategy. It is divided into the four
perspectives comprising financial and non-financial measures. Focusing on such
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multi dimensions of performance prevents sub optimizing and achieving a measure at
the expense of another in accordance with the principle “what gets measured
gets managed” and the rest ignored (Kaplan and Norton, 1996a). For instance,
audit firms should accept only those engagements it could conduct profitably if not it
may want to save costs via reducing time and efforts spent leading to audit failures
(Ziegenfuss, 2000).
In fact, the BSC came about because firms assessed their performance using only
financial measures disregarding non-financial ones whereas it seems that in the case of
auditing standards they actually only consider some of the non-financial measures
disregarding their customers or finances. Further, with no emphasis on customer
satisfaction and competition the medium and small size auditing firms would not be
able to compete with the Big 4 (Cravens et al., 2010; Kaplan and Norton, 2001; Lipe and
Salterio, 2000; Mooraj et al., 1999). Further, auditing is governed by auditing standards.
Any performance measurement system should consider not only factors affecting
the performance of the firm and the attainment of its mission but ensure they are in
compliance with applicable auditing standards. Therefore, since performance
measurement systems including BSC is a flexible measurement tool whereas auditing
on the other hand is a restrictive profession a number of research questions are
addressed to identify, using case studies, challenges facing this peculiar profession.
This research aims at addressing the following questions:
RQ1. What are the challenges facing auditing firms in designing and applying
performance measurement systems?
To answer this research question, the researchers used case study approach in two
Egyptian auditing firms, one of the Big 4 and another medium size firm with
international affiliation. These audit firms were studied in relation to their performance
measurement systems providing insights into the nature of such systems implemented.
Challenges and difficulties facing these peculiar professional firms are identified based
on the results of the interviews made with partners, audit managers and quality control
seniors and the analyses of differences in the design and operations of measurement
systems in such firms. Also, the understanding of the nature of performance systems
actually used by auditing firms would help the process of introducing measures for
improvement and better development of such systems:
RQ2. Is the BSC a valid strategic management control tool in auditing firm? Are
targets set for measures?
The research aims at discussing how a BSC in an auditing firm would help partners
assess the performance of their firms by maintaining a monitoring internal process by
which the firm can control its activities not only to provide high quality of its services but
also to ensure the best use of the firm’s available and usually limited resources.
The answer to this research question would help understand the argument made by
Malmi (2001) that BSCs have been developed independently of the budgeting process to
help control a company’s activities as part of its performance management system.
Malmi (2001) found that budgeting has long served as the core of the control system in
most companies. Targets can be set and performance measured with the aid of the
budget. Malmi (2001) indicated that after the introduction of BSC in Finnish companies’
logistics; the whole organization became interested in the follow up and improvement
of BSC component. He found that delivery reliability and warehouse turnover have
improved and more topics were discussed in board meetings including four or five
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measures of BSC new ones such as control, planning and know how issues. Similarly,
Kaplan and Norton (1996a, pp. 247-248) argue that in most organizations the strategic
planning and budgeting processes were separate, but “strategic planning and operational
budgeting processes are too important to be treated as independent processes […]”.
Malmi (2001) findings confirmed Kaplan and Norton argument that control by budgets
has changed to control by BSCs in many Finnish companies.
The research among the first to investigate the challenges facing auditing firms in
designing and operating a performance measurement system and to discuss, using case
studies, how a BSC could support the auditing firms to overcome such challenges.
Further, the research provides insights into performance measures in auditing firms in
developing economies like Egypt which are sparse since most studies have been
conducted in developed economies. Also, the paper enriches the literature of performance
measurement systems in service rather than the manufacturing sector. Large institutions
and their prevailing practices have been thoroughly investigated yet comparable studies
in medium and small size firms are lacking (Hudson et al., 2001).
This research paper is composed of six sections. An introduction highlighted the
objectives, research questions and contribution of the research. The second section
reviews the literature associated with performance measurements systems identifying
the challenges and behavioural aspects facing an auditing firm. The third section
explains the nature and objectives of the BSC as a performance measurement tool.
The fourth section discusses the research methodology. Discussion of the various case
studies are presented in the fifth section providing how the challenges and behavioural
aspects shaped audit firms measurement system and preliminary investigation of
how the BSC could be used to mitigate the challenges and behavioural aspects facing
auditing firms, in particular, in developing countries. The final section discusses the
research conclusions and recommendations for future studies.
2. Performance measurement systems
Performance measurement has spurred considerable interest and attention in the last
two decades with thousands perhaps even millions of articles and researches
conducted in the area (Abdul Khalid, 2000; Johnston et al., 2002; Neeley, 2005; Scapens
et al., 2003; Taticchi et al., 2010; Yazdifar and Tsamenyi, 2005). The World Wide Web
has over 52 million references on the topic with over 50 web sites dedicated to it not
to mention the number of books and conferences organized; the performance
measurement conference of 2004 presented 94 papers citing 1,246 articles and books
(Marr and Schiuma, 2003; Marr and Neely, 2001; Neely, 1999; Taticchi et al., 2010).
While performance measurement has been widely discussed yet few attempts have
been made to define it. Perhaps the most commonly quoted definition is that of Neely
et al. (2002, p. xiii) “The process of quantifying the efficiency and effectiveness of past
actions”. Cross and Lynch (1992, pp. 20-23) state that performance measurement is
“the single most powerful tool to ensure success of business strategies” and that
“setting and attaining a few key performance measures will help ensure that all levels
of the organization stay on track and pull together behind the corporate engine before
competition beats them to it”. A number of other studies highlighted such importance
(Neely, 1999; Peter and Waterman, 1988; Sharma et al., 2005; Simons, 2000; Sousa and
Aspinwall, 2010).
Other research studies discuss the question of how to measure performance rather
than why measures performance. As Kaplan (1984, p. 414) puts it “choice of appropriate
performance measures is an art that must be practiced in conjunction with strategic
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goals of the firm and in close communication with rapid changes occurring in the firm’s
processes”. Traditionally, firms measured performance only financially in terms of
bottom line result: profits. Emphasis was mainly on cost reduction and gaining
economies of scale thus prominent measures of cost, particularly conversion, included:
budgets, standard costing, CVP analysis, unit cost, direct material and labour costs per
hour. (Fitzgerald, 2007; Fitzgerald and Brignall, 1991; Horngren et al., 2005; Johnson
and Kaplan, 1987; Simons, 2000). However, drastic changes occurred in the business
environment leaving those traditional measures irrelevant and outdated, particularly
the shift from the industrial age of the second wave to the information age of the
third wave making companies compete on how smart rather than how big they are
(Hope and Fraser, 1997). This resulted in numerous changes including globalization,
automation, competition, shorter product life cycles and others (Horngren et al., 2005;
Bromwick, 1990; Gordon and Naryanan, 1984; Johnson and Kaplan, 1987;
Simmonds, 1981; Hoque, 2003; Womack et al., 1990; Yazdifar and Tsamenyi, 2005;
Zimmerman, 2009).
Firms realized that competing in the information age requires emphasis on value
rather than price and competing on the basis of differentiation, quality, customization
and rapid response. Those non-financial measures forced firms to abandon relying only
on financial figures and supplement them with contemporary ones. Profits become
by-product of success, means rather than ends (Fitzgerald and Brignall, 1991). In order
to overcome the problems of using financial measures, strategic measures are required
to indicate the company’s future earnings potential. All efforts in recent years were
directed at constructing a system of non-financial measures linked to strategy (Kaplan
and Norton, 1992, 1996a; Grady, 1991; MacNair et al., 1990). For example, Grady (1991)
studied how the strategic objectives of a company can be broken down into critical
success factors and critical actions. Also, MacNair et al. (1990) presented a performance
pyramids where the management strategic vision is broken down into financial and
non-financial measures at lower levels within the company. Ittner and Larcker (2003a)
found that companies adopting non-financial measures and established a causal link
between those measures and financial outcomes realized higher return on assets
and equity over a five year period. However, the question remains about which
non-financial measures to use in performance evaluation out of hundreds of such
measures. Malmi (2001) discussed the use of BSC as a strategic management system to
set goals, compensation, resource allocation, planning and budgeting, and strategic
feedback and learning including altering whenever necessary the course of action
followed by the management of the business.
Criticism to financial measures focused on the historical nature revealing on
company’s past actions but nothing about its future alertness (Kaplan and Norton,
1996b; Merchant, 1985; Maciariello and Kirby, 1994). Accounting figures do not present
the elements which may result in good or poor future financial results (Anthony et al.,
1984; Merchant, 1985; Eccles, 1991; Maciariello and Kirby, 1994). This is certainly true
for professional services such as auditing practices where partners in auditing firms
aim at achieving quality and fair presentation of financial statements to maintain their
reputation and promote their businesses. Auditing standards do not give that much
attention to how audit firms measure and assess their very own performance. They are
concerned with what the firm develops rather than how it develops its own
performance measurement. Research too focused extensively on the processes and
procedures auditing firms undertake to maintain the quality of their output yet limited
research had been dedicated to their inputs and internal management, thereby creating
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a research gap. As Porter’s (1980, 1985) indicated, the essence of formulating a
competitive strategy lies in relating a company to its competitive forces in the industry
in which it competes. This in turn would require that the strategy be based on the
market segments to be served followed by the determination of the various internal
processes which the company needs to excel in and compete fiercely especially if it is to
provide on its value propositions to clients in the market segments targeted.
Thus, auditing firms should adopt a multidimensional approach in assessing
their performance if they are to be competitive and innovative. Unfortunately,
such measurement task is not easy to implement as auditing firms are faced with the
unique dilemma of developing services to satisfy their customers yet maintaining
distance and independence from them. The entire value of their auditing services rests
on the assumption that they are independent third-party evaluators of how fair are
the financial statements of their clients whom they should not be viewed as having
any associations or influences from them. Further, auditing is a heavily regulated
industry (Kinney, 2005). The development of a performance measurement system in
such peculiar profession should consider not only the elements affecting the
performance of the firm and the attainment of its quality objectives and reputation but
ensure they are in compliance with applicable auditing standards. For example,
auditing standards prohibit performing non-audit services to certain clients which
could have led to additional revenues and profits for the firm. These revenues and
profits would provide additional resources to partners and management to develop and
maintain high quality of services provided. Such restrictions on maximizing revenues
and profitability may affect the ability of auditing firms to maintain the quality of
their services while having a significant portion of their services revenues lost.
To ensure adequate resources are available to maintain audit quality and partners
resist the pressure to accept unlawful non-audit services, auditing firms must have
a performance management tool by which they can provide their services with the most
efficient use of their resources. A performance measurement system should consider
such restrictions and incorporates them.
Moreover, to be able to assess their performance, auditing firms need sound and
advanced information system with some tools to help them perform their audit with
required quality such as expensive programs such as ACL and IDEA. The restrictions
imposed on audit firms to provide non-audit services to their clients may reduce the
resources available for such firms to implement such information system giving
priority to audit tools which are considered more important for achieving the desired
quality of their services. This is especially true for small and medium size audit
firms with their limited number of clients and resources. Also, the assessment of the
employees’ performance in auditing firms would be a challenging task. The assessment
of the quality of the audit service is a group task rather than an individual one where
the issuance of the audit opinion is the result of the efforts of all members of the audit
team. This peculiar nature of the audit service would make the assessment of
individual auditor, audit supervisor and manager a difficult task. Non-financial
and subjective measures such as the proper implementation of audit standards, ability
to identify misstatements and efforts dedicated to the performance of the audit services
are considered important in performance measurement systems in audit firms. Thus, it
is important in those professional firms that more emphasis should be placed on
qualitative measures such as learning and growth, internal business process than
financial measures. As a result of such qualitative measures, rewards to be received by
employees are expected to be tied to measures of the performance systems.
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Although extensive research has been undertaken for performance measurement in
manufacturing sector nevertheless differences exist within the services sector which
prohibits smooth transfer of concepts ( Johnston, 1988). Performance measurement
is more challenging for services. For instance, services are intangible thus difficult to
measure and control. Further, the output is heterogeneous varying across employees
and customers hindering consistency in evaluations. Moreover, the production and
consumption of services occur simultaneously meaning customers are present at the
production time. Consequently some services cannot be measured, inspected or counted
prior to revenue earned neither can wastes be measured and eliminated. Similarly,
if customers are not satisfied with the revenue process itself that they see they may not
be satisfied with the final output. For example, if clients do not get some value for
money in the management letter prepared by external auditors, they may not
comprehend the important role played by the assurance service. Although this may be
perceived as a threat, however, it also enables the opportunity of cross-selling to
customers and the possibility of gaining instant feedback (Fitzgerald and Brignall,
1991). In the following section, the researchers will discuss the nature, importance and
viability to use BSC in various industries and in particular auditing services.
3. The BSC
The BSC is a multidimensional tool that integrates financial and non-financial strategic
measures necessary for survival and sustaining competitive advantage in the industrial
age. It starts with an entity’s long-term strategies and translates them into a set of
objectives and key performance indicators for each perspective continuously monitoring
progress therein (The Balanced Scorecard Institute, 2010; Kaplan and Norton, 1992, 1996b;
Cohen et al., 2005; Sousa and Aspinwall, 2010). The BSC contains outcome measures and
the performance drivers of outcomes, linked together in cause-and-effect relationships
(Kaplan and Norton, 1996a, b, p. 31, 53) making the performance measurement system a
feed-forward control system. Moreover, the BSC would align departmental and personal
goals to overall strategy (Kaplan and Norton, 1996a, p. 10). In other words, the BSC is
intended to provide the means for putting company’s strategy into action.
“The scorecard addresses a deficiency in traditional management accounting
systems: their inability to link a company’s long-term strategy with its short-term
action” (Kaplan and Norton, 1996a, p. 75). The BSC is mainly applied at business unit
level (Malmi, 2001). It is often at business divisions or departments that competitive
strategies are achieved. The findings of Malmi (2001) study confirmed that scorecards
in Finnish companies are developed at lower levels of organizational hierarchies.
BSC is very popular as it has a range of different uses (Norreklit, 2000). It is composed
of four major areas: the financial, customer satisfaction, internal business process
and learning and growth (Kaplan and Norton, 1992, 1993, 1996a; Horngren et al., 2005;
Cohen et al., 2005; Hoque, 2003; Zimmerman, 2009). As stated by Norreklit (2000, p. 67)
“The crux of the balanced scorecard is the linking together of the measures of the four
areas in a causal chain which passes through all four perspectives”. Kaplan and Norton
(1996a, p. 31) see the measures of organizational learning and growth as the drivers of the
measures of the internal process and similar drivers are identified based on the above
model. Norreklit (2000) investigated in details the nature of the cause-and-effect
relationships in the BSC as described by Kaplan and Norton studies. She indicated that
there is no causal relationship between measures related to the four perspectives of the
BSC. She argued that the influence among measures in BSC is not unidirectional,
and rather than cause-and-effect relationship, but is more of interdependence. There is
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interdependence relationship between the growth and debt equity ratio (Donaldson, 1984)
and between customer satisfaction and company image (Kaplan and Norton, 1996a).
Norreklit claimed that Kaplan and Norton confuse cause-and-effect relationships
with logical relationships and means ends (also called finality) relationships (see also
Norreklit and Mitchell, 2007). Finality relationships, however, are different from the
cause-and-effect relationships and are concerned with the means for achieving
particular ends “Whereas cause-and-effect is a statement of an empirical relation, finality
is concerned with the ways in which actions might be taken to achieve a particular
outcome” ( Jazayeri and Scapens, 2008, p. 51). If relationships are based on finality,
Norreklit argued that the concept of coherence becomes important in designing
performance management systems “Whereas causal relations imply a form of
consistency, which refers to the individual element within the (performance
measurement) system, coherence relates to the alignment and integration of the system
as a whole” ( Jazayeri and Scapens, 2008, p. 51). Thus, instead of viewing the relationships
in BSC as a causal one between financial measurement, it may be useful to establish
coherence between various measurements. Norreklit (2000, p. 83) confirmed that an action
is coherent if the actions used and the means are appropriate with respect to the intended
end: “If there is a lack of coherence, then the conditions for reaching the targets are
insufficient or not optimal. The lack of coherence may be so significant that a result is not
obtainable”. Thus, the notion of coherence focuses attention on the wholeness of the
system. This does not suggest that causal relations are unimportant, but we need to look
beyond individual cause-and-effect relationships.
Just like the BSC is multidimensional, its benefits too are multi-fold justifying its
worldwide popularity. It links the performance measures with business unit strategy in a
way which may reduce conflict among managers and their subordinates. BSC promotes a
more holistic approach to performance evaluation (Wong-On-Wing et al., 2007). In a BSC,
strategy is translated into operational terms through strategy maps which present the
cause-and-effect relationships both within and between the four perspectives of the
scorecard. Management can attach rewards and incentives to the various performance
measures and the daily operations can be linked with the strategy. Strategy maps and
leading and lagging indicators represented in the four perspectives of the scorecard will
help to communicate the strategy down the company. Similarly, in assessing the
implementation of the business value scorecards (BVS) in a service company, a
performance measurement tool which contained five key values (BSC four measures
and partnership) and evolved over an extended period of time, Jazayeri and Scapens
(2008, p. 57) noted “Consequently, in late 1994, a culture change project was adopted to
restructure the operations of BAE by creating teams, sharing information, and
delegating responsibility and accountability all the way down the hierarchy. As such,
the company was moving from a privatised bureaucratic model of organization to a
task-driven organization in which what needs to be done governs who works with whom
and who leads”. According to Jazayeri and Scapens (2008), the application of BVS
contributed to recent success of BAE, a UK aerospace company.
Kaplan and Norton (1996a) recommend that firms may identify strategies based on
the firms core competences, based on which firms identify their market segments. Such
a process, in Kaplan and Norton view, would not affect the BSC, as it is a strategy
implementation tool. They also emphasized the benefits of the BSC as not only a
strategic measurement system but also a strategic control system clarifying and
gaining consensus about designed vision and strategy, align departmental, divisional
and personal goals to strategy, linking strategic objectives to long-term targets and
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annual budgets, determine and finally obtaining feedback to learn more about strategy
for improvement and development of better actions and decisions. The establishment
of such control system would provide the right conditions for discussion and debates
and help to motivate employees to gather needed information away from the usual
business routines and channels (Simons, 1995, p. 96). In establishing such system,
management must assess at all levels of the organization whether the strategy is
tenable. Kaplan and Norton (1996a, pp. 251-252) recommended that “the measures of
the designed balance scorecard should form the basis of interactive control and
double-loop learning”.
Kaplan and Norton (1996a) consider the BSC as the culmination of a process which
starts from the top management’s strategic vision of the business, which is used to
develop the performance measures used to communicate strategy down the organization
to achieve success in its implementation. They warned top management not to force
strategy on lower level management but should emerge from within the organization.
This may require that the divisional managers share in the development and
implementation of the strategy and its measures throughout the organization. De Hass
and Kleingeld (1999) suggest that a system of strategic dialogue through which
performance measures are formulated through continuing dialogue within the company
about the nature of the leading and lagging indicators. This strategic dialogue
would result in organizational learning and strategic development ( Jazayeri and Scapens,
2008). Moreover, Wong-On-Wing et al. (2007) stated that divisional managers (rates)
may ignore the BSC if they believe it to be totally subjective, unfair or irrelevant to their
performance evaluation.
Despite its alleged popularity yet some research studies show the contrary. For
instance, the French shows limited interest in the concept due to their implementation of
the French Tableau de Board (Bourguignon et al., 2004; Epstein and Manzoni, 1997) while
only 26 per cent of the most important publicly traded firms in Switzerland, Germany
and Austria adopt it with the majority applying only a partial version of it (Speckbacher
et al., 2003). Malmi (2001) using a series of semi structured interviews found that the idea
of linking measures together on the cause-effect relationships was not well understood by
early adopters (i.e. top and senior divisional managers) of the BSC. Further, there has
been documented implementation failures for BSC leading firms to discard it all together
or considered it as a static rather than dynamic owing to over emphasis on financial
measures thus tipping the “balance” excessive measures making firms “drown in data”
collected (Neely, 2003; Norreklit, 2000). Also, other criticism of the BSC included not
setting the right performance targets, casual links between drivers including strategy
and outcome measures are sometimes overlooked due to laziness or misconception that
they are self-evident, inability to agree on a strategy to help the development of a BSC,
inefficient implementation by management, measuring performance incorrectly using
outdated and traditional models such as surveys, inability to quantify qualitative results,
inability to monitor the competition or technological development, no continuous
observations of competitors actions and results, delay in feedback or time consumed
setting it up and improper communication of BSC objectives to lower level management
(Ittner and Larcker, 2003a; Malmi, 2001;Malina and Selto, 2001; Olve et al., 2004; Pforsich,
2005; Dent, 2005; Ho and Mckay, 2002).
Additionally, some researchers are concerned with the lack of evidence supporting the
general hypotheses that BSC leads to financial improvement (Chenhall, 2005; Brignall,
2002; Norreklit, 2000, 2003; De Waal, 2005; Hendricks et al., 2004; Cohen et al., 2005)
and some were successful in finding that the BSC shows no connection with economic
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performance. Moreover, BSC is incomplete failing to consider other stakeholders
beyond customers such as competitors, suppliers, government, regulatory bodies,
community or the environment (Brignall, 2002). Kaplan and Norton’s (1996a, p. 34)
responded to such concern “no mathematical theorem exists that four perspectives
are both necessary and sufficient” meaning firms are free to add or delete perspectives
as they see fit.
Based on the above discussion of the nature, components and use of the BSC, such
measurement tool would help auditing firms integrate both financial and non-financial
measures into their performance assessment. It helps to assess how audit objectives are
achieved in audit teams and other departments’ activities. It show the way for auditing
firms to develop audit plan and level of risks at lower level management (i.e. audit team
levels) before presenting such plans and risk assessments to senior auditors and
partners. The coherent and interdependent relationship between the four measures of
BSC would motivate all management levels in an auditing firm to have a constructive
dialogue “Brainstorming sessions” for establishing audit objectives and strategies.
Management in an auditing firm are advised to use the dialogue to encourage
employees and auditors to undertake a continuous search process to uncover
misstatements and opportunities for quality improvements as well as creating a
network through which information about audit plans and audit results would be
communicated and monitored within the firm’s goals and strategies. Such objectives
and strategies might be modified, without sacrificing the quality of the audit as per
auditing standards, based on the evaluation of the clients’ satisfaction. However, there
are challenges facing management in an audit firm to link rewards with firm strategies
and objectives as the provision of the audit services is the result of cumulative efforts
of all members of the audit team. It is highly subjective and judgmental for the audit
partners and quality control managers to assess the performance of each auditor within
the audit team for a specific audit engagement. The BSC in an audit firm would help
to achieve an effective control system as it would provide the right circumstances for
discussion and debate as well as motivate auditors, supervisors, seniors and audit
partners to gather needed information independently from the traditional and usual
business channels.
Finally, audit firms are always under pressures to provide new services related to
accounting, taxes, corporate finance, corporate governance and all types of restructuring
with the aim to continue to compete in very competitive business market especially from
the medium and small size audit firms. This is certainly an important challenge for such
professional firms giving the limited financial and human resources and restrictions
imposed by auditing standards and local regulations.
4. Research methodology
The current research is a mix of both descriptive and exploratory analysis. It is
descriptive in the sense of describing what performance measures are used in two
Egyptian auditing firms identifying challenges facing such firms in the design and
operations of such measures then exploratory when investigating the viability of using
a BSC framework given the regulatory environment governing the audit services and
its outputs (Robson, 2002; Saunders et al., 2007; Brown, 1998; Otley and Berry, 1998).
Robson (2002, p. 178) defined case study as: “strategy for doing research which
involves an empirical investigation of particular contemporary phenomena within its
real life context using multiple sources of evidence”. Yin (2003) highlights that a case
study copes with technically unique situations in which there will be several issues of
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interest more than data could point to. Case study explored and gained an in depth
analysis of performance system across the two studied auditing firms. It enabled
the researchers to get closer to the issues and understand the practical application of
the performance systems better than any other approach would have. Additionally,
it supplied a sense of reality about the performance systems in actual situations
showing the peculiarity and special characteristics embedded in audit practices.
A number of techniques have been identified as suitable for the current research
characterized with being qualitative, aiming for exploratory and descriptive purposes
and adopting case study approach, namely, interviews, documentary analysis and
participating observation (Collis and Hussey, 2009).
4.1 Interviews and participant observation
The research was conducted using both semi and unstructured interviews at various
stages of the research (Saunders et al., 2007). The interviews were conducted in summer
2010. The authors intended to interview partners and quality assurance managers in
many auditing firms in Egypt but found that most of these firms consider information
about performance measurement strictly confidential and unique to their business
success. Thus, interviews were limited to two auditing firms with international affiliation
which agreed to provide the required information about their performance management
systems. Interviews with the advisor of the chairman of the Big 4 and the quality
control manager of the medium-sized audit firm were useful for generating their opinions
to refine and adapt the literature about performance measurement for auditing firms.
This allowed for applying standardised questions equally to both firms, highlighting
differences between them, while at the same time requesting any additional information
needed. Questions asked were developed from issues arising in the literature and refined
based on insights from the pilot testing. They concentrated on the type of performance
measurement system each firm is applying and the components of such system.
Unstructured interviews were used with the quality control manager, two executive
partners and four audit managers and supervisors of the medium-sized audit firm
to understand and assess the process by which those parties ensure clients’ satisfaction,
internal process and measures applied within the firm concerning innovation and
introduction of latest technology. The researchers recorded all interviews, clearly
explaining to the interviewees the purposes and benefits of the research to them and
collecting as much information as possible during the interviews where some interviews
extended beyond two hours at the interviewee’s consent.
Observation entails the systematic observation, description, recording, analysis and
interpretation of people’s behaviour (Saunders et al., 2007). Observation could be divided
into structured and participant. Structured is better suited for quantitative research and
measuring the frequency of actions. Participant is where the researcher is “immersed in
the research setting” (Delbridge and Kirkpatrick, 1994, p. 37) enabling the researcher not
only “observe what is happening but also feeling it” (Gill and Johnson, 2002, p. 144). In the
current research, the researchers were truly “immersed” in the setting enjoying the
chance to observe the advisor to the chairman, the audit partners, the quality control
manager and audit supervisors at work, observing how they measure their performance
and how the employees fill in the required documents and hand their work.
4.2 Documentary analysis
Most organizations prepare a wide variety of documents some of them internal including
organizational charts, minutes of meetings, memos, management reports […], etc., and
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others external such as annual reports, press releases, shareholders report […], etc.
The research utilized organizational and virtual online documents in both their forms
internal and external. The above documents were already prepared for a purpose other
than at the researchers’ request becoming secondary data in a sense. This offers the merit
of eliminating any reactive effects thereby avoiding validity concerns.
The firms’ CVs, web sites and brochures handed to clients built the background for
both auditing firms. Internal documents analyses were useful in understanding and
describing the performance measurement systems adopted in both firms. If the firm
already prepared documents to measure a specific element within their performance
measurement system including BSC and considered it important then this provided direct
indication to the practicality of such element. Moreover, virtual documents such as firms’
web site and online information were used to triangulate some of the information found in
the printed records. Problems faced with documents include the time consumption
and frustration to research them, skilful interpretations required to understand them and
access to confidential documents may be denied (Bryman and Bell, 2007). However, both
firms were generous enough and interested in the topic to allow deep and free access into
the records including those usually marked as confidential.
5. Challenges facing auditing firms in measuring their performance
5.1 Performance measurement in the Big 4 audit firm
5.1.1 Awareness of measurement systems including BSC. Despite the Big 4 audit firm
advisor possessing full awareness of the importance of performance measurement
systems and BSC concept yet the BSC per say is not implemented. He stated, “Each and
every element in the BSC is individually measured owing to its importance specifically
in such a big firm. Audit firms consider their major assets are people, knowledge and
clients, people use knowledge to serve clients who provide the financials and reputation
that stimulates growth, which in turn provides the capability for acquiring new people,
increasing their knowledge and transferring this knowledge to clients; it is a never
ending cycle needing constant monitoring”. A similar argument has been presented by
Eccles, (1991). Although the advisor agreed with the importance of BSC yet in terms of
practicality he notes “BSC is not for all firms. Some measures would not be adequately
measured, if any, by medium or small sized firms lacking sound information systems
to record and measure the various elements. Perhaps only 6 or 7 audit firms in Egypt
could enjoy adopting such approach” (see for instance, Sousa and Aspinwall, 2010;
De Waal, 2005 for similar observations).
5.1.2 Learning and growth. 5.1.2.1 Employee capabilities. The advisor to the
chairman of the Big 4 confirmed that the firm fully supports the need for skilful
employees, predominantly in a professional occupation such as auditing, continuously
developing their skills through training (as prescribed by ISA 220). Qualification of
professionals are measured in terms of international certificates received, average years of
audit experience and calculating percentages of qualified professionals relative to the less
qualified ones. It accentuate recruiting highly specialized individuals evidential from
experience requirements in job advertisements it publishes in the most widely circulated
daily newspapers in Egypt; particularly that the firm divides itself according to lines of
business necessitating exceedingly experienced professionals in every line. “We advertise
in one of the top newspaper in the country requesting application from all graduates,
qualified and experienced candidates to apply for most of the audit vacancies […].
We receive thousands of applications from all over Egypt and the process of evaluating
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applications takes usually not less than a month before preliminary interviews are made
and applicants set for written tests”, commented the advisor to the chairman.
Moreover, the firm considers training a vital element and has a strict policy of
requiring a minimum of 20 training hours annually and a minimum of 120 hours within
three years to be completed by every employee. Detailed training log is kept for every
employee, including partners, specifying training hours attended, contents received
and name of instructor(s). Such log is also used by managers in recommending and
evaluating training needs of subordinates.
5.1.2.2 Employee motivation and satisfaction. The Big 4 audit firm prides itself on
being the “employer of choice” where people aspire to work there. It is very well known
and respected that all stores and schools nearby describe their address as being “where
that firm is”. A system called “dialogue” is executed as a record between management
and staff recording everything such as whether they are satisfied or not, if they encounter
any problems, complaints, suggestions […], etc., but no “score” is calculated. This is in
line with De Hass and Kleingeld (1999) and Jazayeri and Scapens (2008) observations.
Employees are welcomed to contribute suggestions in a suggestion box nonetheless no
employee actually did. Even if employees did in fact provide suggestions the firm would
still not be interested in calculating percentage of those actually implemented or how
many are empowered to “manage quality” since all are welcomed and encouraged to
show concerns for quality not necessarily through the box. Employees are also motivated
through the firm taking ideas from bottom line to top managers either in a written or
spoken form not necessarily in a formal way with the understanding that employee
satisfaction enhances performance. “Meetings are held on a weekly basis between
partners, managers and auditors to discuss problems faced during the week especially
those affecting financial statements and decisions are taken including direct contact with
top management of the client to solve and discuss these problematic issues”, explained
one of the partners. The firm’s approach coincides with suggestions made by Simons
(1995), Wong-On-Wing et al., (2007), Kaplan and Norton (1996a) and Norreklit (2000).
Every employee is appraised monthly, quarterly, annually and after every engagement
on factors such as skills and behaviour. Every employee is asked to appraise their own
self followed by the appraisal of their assigned performance manager to validate it. Since
auditing is team effort a proportion of compensation is based on individual appraisal and
another on that of the team as a whole.
The Big 4 audit firm disapproves of the use of turnover rate as an indicator of
employee satisfaction in a competitive labour market like Egypt where there is visible
trend of high turnover associated with middle managers. “They have experience, still
young and bilingual, a catch for any firm particularly in the Gulf areas therefore we try to
keep them in using generous compensation packages and fringe benefits. An employee
may be staying with me because he needs the money or can’t find another job not
because he is happy in here” explained the advisor to the chairman of the Big 4. On the
other hand, the firm recruits a number of fresh graduates each year thus the number of
staff stabilizes and appears constant yet its mix is moving more towards fresh graduates
and less towards middle managers. Nonetheless, headquarters oblige annual reports on
numbers and costs of hiring, turnovers, training […], etc., to be prepared.
5.1.2.3 Information system capabilities. “A fundamental resource to any audit firm
is the information system or ‘library’ it holds conveying information required for
effective auditing” stressed the advisor of the Big 4 firm. The firm sets up sophisticated
information system containing the company’s files and records, highly secured customer
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database, a library holding up to date information on auditing standards, regulations,
Egyptian and International laws, auditing models and techniques, references and any
other information deemed necessary for employees to perform a high-quality audit. In
addition, state of art electronic auditing tools such as computer assisted auditing tools
(CAATs) is implemented (as explained by Gray and Manson, 2007). The advisor to the
chairman confirmed the importance of such system for the success of any performance
evaluation systems (see observations made by Malmi (2001) and Jazayeri and Scapens
(2008) when they assessed BVS for UK aerospace company).
5.1.2.4 Growth. Previously, the Big 4 audit firm measured its growth using the
number of customers or total revenues received but now adopts a principle of “what is
important is not to be filled with muscles but to be healthy” meaning quality should
supersede quantity; having profitable customers supersedes a large client base.
Accordingly, customers’ numbers have been declining over the years owing to
discontinued operations with unprofitable ones. Every quarter, the managing partner
presents to the executive partner the results of each audit group in terms of revenues
matched against direct costs to ensure it is “real growth” not just increase in clients
with no increase in bottom line, a concept the firm describes as “over sales”. This figure
is compared with budget and last year’s results identifying any problems such as if a
client sued the firm, staff problems occurred or a partner is unhappy […], etc., which
could affect firm’s growth. In addition, it measures its ranking with respect to the other
Big 3 audit firms operating in the Egyptian market using the internationally agreed
upon measure “total billings” received by each of the Big 4.
Further, time to develop new products is critical to growth of firms (Kaplan and
Norton, 1996a). Some services are directly prescribed by headquarters taking the firm
virtually no time to develop. However, the firm adopts a principle “serve all clients from
the time they start thinking of investing in Egypt till they liquidate” for example,
helping in issuing work permits, developing marketing studies, feasibility studies […],
etc., even though such services are not accounting per say. More than six new services
within the last two years only were introduced by the firm (i.e. 2009 and 2010). One of
which is for instance risk management for banks headed by a French manager
employed specifically for this purpose to provide customers with services they
specifically asked for yet again it values the quality (measured in terms of net revenues)
of innovated services as opposed to their number. Moreover, the firm ensures any new
services offered are conforming to independence standards since the provision of some
service to audit clients such as bookkeeping are prohibited whereas others are allowed
only if the audit committee agrees (see Gray and Manson, 2007; Arens et al., 2009).
5.1.3 Internal business process. The advisor to Big 4 audit firm indicated that
internal business process is measured through effectiveness and efficiency. First,
“Effectiveness is viewed as the ability to deliver high quality audit with an appropriate
report”. This is assessed with reference to the detailed documented working papers
describing every single step of the audit and mandatory to be prepared in both manual
and electronic formats. They also have to be prepared in both Arabic as per Egyptian
laws and English as per headquarters’ rules. Multi-layered and strict quality control
procedures are in place to monitor effectiveness as follows.
Every single audit must have its working paper reviewed by a partner. Any
“significant audit” with respect to size or risk is to be thoroughly read and signed by
the managing partner. All listed companies audited must have their working paper
additionally reviewed by a “conquering” partner who was not involved at any stage of
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the audit to ensure the audit report is fully supported by the working papers. More and
above, internal quality control department reviews a selection of client’s papers while
also assuring all audit files are in place, required signatures are present and no
improvements are needed. Even more, international quality control reviewers from the
headquarters annually complete both general and specific quality reviews. As
explained by the advisor to the chairman “We take the assessment of our audit quality
and performance undertaken by the Headquarter very serious as the results of the
assessment may have bad implications for our firm as representing one of the big 4
CPA firms in the world”. General quality reviews evaluate performance of the firm as a
whole on areas such as trainings conducted, verification of independence checklist
declared by each auditor claiming full independence, education and qualification of
auditors, acceptance and continuation of clients, effectiveness of information systems,
measures to protect client’s records and maintain confidentiality ensuring only
authorized access, compliance with rules and regulations and many others. Specific
quality control re-reviews a sample of working papers already reviewed internally to
evaluate their effectiveness in addition to personally reviewing their own sample.
At the same time, second, “Efficiency is deemed as the ability to perform high
quality audit at lowest cost”, confirmed the advisor. A strategy and plan is developed
for every engagement and a budget prepared (as suggested by Fitzgerald and Brignall,
1991; Kaplan and Norton, 1996a, b; Malmi, 2001; Norreklit, 2000; Ittner and Larcker,
2003a). Estimated hours needed are multiplied by chargeable rate applicable to every
auditor on the team reaching budgeted revenues necessary to cover costs. The actual
times and revenues received are benchmarked against this to compute the “recovery
rate” and evaluate on time deliveries. Firm specifies a 70 per cent recovery rate. Any
deviations could be attributable to an unrealistic plan, client failing to submit records
on time or problems specifically for the Egyptian environment such as traffic time
wasted to get to and from client. Another reason is usually because the firm is known
for “over auditing” by looking deep into the client’s files, accumulating various samples
and evidences […], etc., This problem was identified and reported in several quality
control performance reports. Nonetheless, the firm considers this an advantage they
plan to maintain.
The concept of “after sales service” was rejected as applicable to auditing: “We are in
the business of providing a professional service not a commodity with warranty, as far
as we are concerned the audit is done once the report is signed and the firms attends the
client’s AGM. If the clients need more than this we will charge them for extra services.
The only after sale meaning after audit event calling for action is subsequent events
that occurred after report issuance and before the AGM in which case modifying the
report may be needed” objected the advisor. If the firm offers recommendations, such as
those regarding internal control, then whether the client applies them or not is not a
measure of the firm’s performance but is up to the client. If the client fails to adopt an
important recommendation the firm may need to qualify the report but cannot consider
it as failed to convince a client of its recommendations.
5.1.4 Customers. Very formal and written procedures for reaching and measuring
customers’ satisfaction using three ways are in place mostly stipulated by
headquarters. First, customers’ satisfaction questionnaires are sent to the highest
position at the client’s firm requesting response directly to the Big 4 audit firm’s
chairman without the knowledge of the audit partner who was in charge. This is a dual
tool used to evaluate the partner simultaneously with measuring satisfaction on areas
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such as reasonableness of audit duration, value added by the service, behaviour of
personnel on site […], etc. It is a five points Likert scale with 5 being excellent. The
score is analysed after removing all extremes. For instance, if a response has all 1s it
may suggest the client is dissatisfied with the partner or if it has all 5s the client may
not have understood the questionnaire or just wants to compliment the partner thus
removing those extremes seems fair.
Although the Big 4 audit firm randomly selects a sample to contact yet it biases it
towards three factors: first, the opportunity the firm has for expanding services to client.
For example, while banks pay low fees yet if satisfied they will refer the firm to their
customers such as borrowers or companies the bank establishes. Second, the risk the
client faces where the firm has a policy “what worries the client worries me”. For
example, if the client is facing severe competition affecting going concern then he might
have incentive to falsify records. Lastly, fees are considered; usually clients with low risk
and low opportunity also pay lower fees so are given less priority in the selection process.
Second approach utilizes direct calls made by the managing partner to a list of
clients arranging for a meeting to discuss satisfaction. This is mainly used with those
clients too busy to fill in questionnaires. Although the above approach is in direct
contact with clients yet could create problems. “Egyptian consumers are quality
conscious, if the manager himself goes in to ask about the firm’s performance they will
automatically conclude there is a huge problem the firm needs solving rather than
actually enriching quality” explained the advisor to the Big 4 chairman. Lastly,
outsourcing is applied using specialized institutes. Those are provided with a list of the
clients and an official letter printed on the firm’s letterhead addressed to clients
requesting them to respond to the questionnaires aimed at satisfying them (Eccles,
1991; Malmi, 2001; Jazayeri and Scapens, 2008 confirmed the growing popularity of
using questionnaires and outsourcing to measure customer satisfaction).
While some writers view brand awareness as a success indicator (Kaplan and
Norton, 1996a, b; Jazayeri and Scapens, 2008) particularly relevant to the case of a Big 4
firm yet the firm itself suggests clients may contract with it if they are large thus
require a large firm to audit them not directly because it is one of the Big 4. Similarly,
high fees charged may not be indication of success but a reflection of efforts exerted in
conjunction with client size. Further, this firm is actually known more for its chairman,
a prominent and well respected accounting figure in Egypt, than for being a Big 4.
In fact “the franchise’s cost like levies, professional insurance indemnities (PII) and
others may actually outweigh their benefits” added the advisor.
5.1.5 Financial. The firm’s sophisticated information system and recruitment of
vastly qualified accountants enable it to comprehensively measure its financial
performance using the measures in the literature for BSC which are already prepared.
It measures operating profit for every audit team as revenues less direct costs. This is
then piled up to reach operating profit for every executive in charge of a cluster of audit
teams which is too accumulated reaching profits per senior partner. Overheads and
partner’s remuneration are then deducted attaining firm’s profit. Such process is
repeated quarterly till reaching year end profits which is compared with budgets and
last year’s figures for the purpose of amending any significant unfavourable variances
and for use in gross and net profits margins computations.
Expected revenue per engagement and “recovery rates” are calculated as previously
discussed. Revenues from new services are analysed and revenues from ordinary
services broken down by category and line of business. Moreover, cost per auditor is
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calculated using time sheet filled by every auditor multiplied by applicable hourly rate
compiled to reach cost per audit teams. The firm finds it unnecessary to compute asset
turnover or revenues per auditor. In addition, in calculating profits per partner and
distributing profits the firm adopts a methodology prescribed by headquarters. While
the advisor was generous enough to explain it and allow viewing of supporting
documents yet requested the recorder be switched off and this part omitted since it is
confidential to headquarters.
5.2 Performance measurement in the medium size audit firm
It could be said that while the Big 4 audit firm does not adopt a BSC per say yet
its performance evaluation system could be argued to resemble it. The medium firm
apply a measurement system which does not comprehensively follow the BSC
measures. Therefore, it provided an interesting insight and opportunity to identify
whether a BSC would be viable for all types of audit firms with their different operating
characteristics and sizes.
The medium size audit firm measures its performance mainly with respect to its
personnel. Sophisticated and detailed procedures are implemented to ensure
employees perform as intended, are knowledgeable and presentable. Further, it
values more the quality of its output necessitating thorough working papers be
prepared for every engagement and every auditor. It aims at promoting its business
by showing the quality of its outputs. It is one of the first firms in Egypt to develop an
internal quality control department specifically for this purpose perhaps because all
partners of the firm are highly respected academics who are constantly aware of
current developments in accounting, auditing and management issues and possess
quality awareness. The firm’s performance system will be described and each
measure within such system will be tested for practicality including possible
application of BSC. If a measure of BSC is applied in the firm this indicates
practicality whereas if not reasons are provided.
5.2.1 Awareness of BSC. The medium-sized firm does not adopt a BSC for its
performance. Although the quality control manager was not previously aware of the
concept yet heavily supported it when explained stating “it is very practical of firms to
measure all those aspects since they do in fact lead to success”. He particularly agreed
with the cause-and-effect relationship (as described by Kaplan and Norton, 1996a, b;
Kaplan and Atkinson, 1998) stating “for firms to attain their strategies they need to hire
qualified employees capable of delivering effective internal processes that satisfy
clients who pay the audit fees” and “to satisfy external entities one needs to develop
own self internally first before looking externally at the needs of others”.
5.2.2 Learning and growth. 5.2.2.1 Employee capabilities, satisfaction and
motivation. The medium size firm takes special care in evaluating performance of
every individual monthly, quarterly, annually and at the end of each engagement. Several
documents and checklists are set for such purpose. One of whichmeasures the employee’s
competency on factors as: awareness of the job’s tasks, work quality, speed of concluding
work, following plans, continuously updating working papers, trustworthiness,
behaviour, self-motivation, attendance, punctuality, appearance […], etc. Each measure
is weighted and a score calculated. Another document evaluates auditors after every
engagement where they give a full report on all tasks performed, duration consumed and
expenses incurred such as travel. This is fully reviewed by their supervisors and quality
control manager to assess the auditor’s performance and is also used for assessing
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engagement’s plan and expected costs formulated. Other forms are used for evaluating
employees nominated for promotion and separate form is used if an employee is
nominated to be a manager stressing on characteristics such as leadership,
communication skills and qualifications.
The partner interviewed explained “On an interim basis, evaluation forms of audit
groups under my responsibility are presented for examination and assessments, personal
interviews are carried with selected candidates for promotion where technical discussions
about their performance and behaviour are undertaken before a final decision is made by
the board of partners”. Besides employees’ evaluation and promotion, those forms are
used for compensation, directing employees, supervision, recommending specific
trainings, costs control and assuring compliance with professional standards.
At the same time, qualification of employees is measured by years of experience and
number of employees holding international certificates where a list of all employees is
prepared with qualifications held by each. However, satisfaction forms are not prepared
because the firm believes it can “tell” if employees are satisfied through their evaluation
forms “if he is performing well, has good relations with colleagues, impressive attendance
records […] etc., this suggests he is satisfied, yet I don’t see a reason why we can’t
prepare such a form tomorrow” explained the quality control manager of the medium size
audit firm. Also, a “suggestion box” is available with keys held by only the partners
encouraging personnel to anonymously submit complaints or suggestions or talk directly
to qualitymanager. This whistle blowing feature should enhance the independence of the
auditors. “Information was leaked few years ago about an audit manager who received a
loan from the bank he is auditing at the banks’ employees interest rate without the
consent of the firm and he was fired after the discovery of this unethical and
unacceptable behaviour” confirmed the quality control manager. Also, “the strong
personality and the way the partner responsible for the administrative management of
the firm helps minimize the occurrence of similar unethical incidence”, explained both the
partner and the quality control manager of the firm.
To ensure the growth of the firm and motivation of employees, they are given
targets and appraised using the number of activities to be performed monthly rather
than hours worked. “Employees who hand in their work in shorter time are better than
those staying hours just to report them on their time sheets” explained the quality
control manager. Working conditions can be considered appropriate. “I come and leave
work at appropriate hours, have complete freedom to do my prayers, no discrimination
is encountered in the firm on any basis and any work related travels are entirely paid
for by the firm” described one of the firm’s audit managers. “Quick decisions are made
concerning paid allowances for any new locations outside Cairo to be visited for audit
related to new clients, ensuring adequate compensations are received at the end of
every month” stressed the audit supervisor responsible for the audit of a number of
clients outside Cairo. Moreover, salaries and statuses are prorated upwards in reflection
to qualifications received especially those holding international qualifications.
However, “audit trainees are still in need of increase in their salaries to be able to
establish a family with all related capital expenditures needed for such purpose”, said
one of the firm’s audit supervisors.
Employees are also sent for training in areas the firm feels necessary, specialists are
asked to provide in house trainings and partners continuously attend internationally
recognized conferences to broaden knowledge. However, no training logs are kept since
“auditing is a practical occupation, everyday my employees go to work this is training
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for them, I cannot separate their working hours from their training hours and count
them” objected the quality manager. However, the firm has a policy to pay for external
training workshops or twice a year internal training for enhancing the employees
accounting and auditing standards’ knowledge.
As to the assessment of the work of employees, compensation is only based on
individual work. “Although auditing is a team effort yet I cannot tie rewards of one for
the performance of another” the partner clarified. Linking rewards to performance
has been debated in the literature; some support it (Eccles, 1991) others condemn it
(Neely, 1999). “Outstanding employees are motivated to become partners through
special salary increase, moral support and words of appreciation of their works, speedy
promotion especially once they earn professional certificates”, explained the quality
control manager. Finally, costs of recruiting, training and developments are documented
and scrutinized.
5.2.2.2 Information systems. The firm has an up to date and comprehensive
catalogued library holding the latest journals, books, references, auditing standards,
laws […], etc., in both hard and softcopies in addition to internet connection and a
laptop for every employee to acquire more knowledge and the ability to contact highly
specialized professionals for any enquiries. Time taken to adapt to new technology is
not formally measured but as soon as a new relevant advancement is introduced the
firm aims to promptly adapt it paying adequate sums of money to enhance the skills
and knowledge of the firm’s employee, managers and partners. “The policy of the firm
is to spend thousands of Egyptian pounds on new technology for the advancement of
employees learning process and at the same time making tax savings as these costs are
tax deducted”, confirmed one of the audit managers. Speed of adaption is not formally
measured yet it aims to rapidly introduce the necessary changes including training
sessions and distributing copies of the new standards to all employees. Also, softcopies
are provided for use by the employees on their laptops while they are at the various
clients’ premises. The firm has been using CASEWARE audit tool to electronically
document the audit work and ACL for automating the field work tests.
5.2.2.3 Growth. Despite keeping no records of the number of new services offered
yet the firm seeks developing new services via discussions with clients regarding their
needs, awareness of innovative services offered by others principally international
firms […], etc. Also, the firm provides offers to clients, participates in tenders to enter
new segments and continuously monitors advertisements for auditors or consultancy
services while simultaneously marketing its services to attract more clients.
At the same time, the researchers noted that several firms in Egypt, including the one
under study, have professional affiliation with international audit firms which provide
guidance and advise on controversial issues, trains employees in their headquarters […],
etc., thus helping the firm grow in a speed exceeding its competitors in the market. As
to revenues, they are known by executive partners yet costs are more challenging to
measure. No formal records are kept for this since no individual is responsible for
management accounting. Yet “if I wanted to get the cost I can look into hours worked by
personnel divided by their monthly salary to get hourly rate then multiply it by hours
worked on every engagement to estimate its cost” explained one of the executive partner
in the medium size firm. Further, revenues from new services are directly and separately
measured by executive partners. All information about the firm’s service fees are
considered strictly confidential as partners believe that the information may have bad
implications on the firm’s employees in relation to their salaries and other remunerations.
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5.2.3 Internal business process. 5.2.3.1 Pre-audit. Despite being medium yet the firm
has sufficient resources to recruit the “best there is”. However, “while all firms want
specialized employees yet there always exists a need for fresh graduates who are then
developed, or those with ‘character’ rather than just skills. What is important is to avoid
hiring individuals with no background at all in accounting, other than that anything
could be learned and trained” indicated the quality control manager. At the same time,
independence is priceless for any audit firm (Gray and Manson, 2007). The firm has
strict measures for circumventing any breaches through an independence deceleration
form signed by every auditor on the team who attests to not only possessing full
awareness of requirements of independence but fully intends to comply with them in
addition to closely supervising employees during work: “the office takes a very serious
stand against any breach of the code of conduct by any employee as the reputation of
the medium size CPA firm is the key for maintaining clients, promoting the firm
activities and gaining more recognition within the community” explained the quality
control manager and confirmed by one of the partners.
On the other hand, clients are assessed on the basis of risk, previous year’s reports;
personnel’s comment, cost/benefit analysis […], etc., and informally by partners. A plan
is made for each engagement including exact dates and times each step of the audit is
expected to be completed which is then compared with actual time taken. Time to
develop the plan itself is evaluated and varies according to complexity of client but for
continuing clients it may only take couple of hours. Also, the firm stresses on
continuously recoding and updating the working papers where each employee carries
an “agenda” in both hard and soft copies describing every single activity performed.
A “show your work Saturday” is applied whereby employees show their weekly work
done to their supervisors and quality control manager (most auditing firms in Egypt
works from Saturday to Thursday). Further, hard copies of the clients’ records are
safely stored in an “archive” with keys only with the authorized individual. Similarly,
soft copies are preserved on a “server” with password only known by authorized
individuals and partners who have direct access to such information. Both archives are
insured with smoke detectors and fire alarms installed everywhere.
Moreover, latest technologies are used where a list of all software and hardware is
kept and annual maintenance and upgrade conducted. Although CAATs tool are not
fully implemented yet CASEWARE and ACL are being used to document audit work
and fieldwork tests, respectively. Quality control manager and his subordinate visit
employees on “surprise” visits on the field; verify and review their “agendas” and
working papers prepared before submission to partners, develop employees’ skills via
recommending necessary trainings and continuously updating auditing models,
references […], etc. In addition, annual quality control visits from the headquarters of
the affiliated firm further assures quality is maintained for all the mentioned elements.
5.2.3.2 Quality of service. Working papers are used to assess the effectiveness of
auditors in detecting any misstatements within the clients’ financial statements.
Nonetheless, “clients may not have any to begin with thus failure to detect any doesn’t
mean auditors are unqualified” added the quality control manager. “All employees are
adequately supervised via their supervisors, quality control department and inspection
of their ‘agendas’ ”, explained the quality control manager.
Also, engagement performance is measured through both internal and international
quality reviewers,mainly with reference to working papers, and several checklists are used
to ensure standards were followed, all documents are present, sample sizes appropriates,
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plan was followed […], etc. The office also implemented a measure to inform clients of
significant remarks. Official management letter printed on the firm’s letterhead is
addressed to each client at the end of each engagement expressing all recommendations
identified. The firm believes it is not employed only to provide audit but also to supply
clients’ chief operating officers and chief financial officers with professional
recommendations and add value to their business. Clients are informed of and approve
to the precise times planned for the auditors to be on site to eliminate any disruptions or
relationship strains, employees are constantly friendly and courteous […], etc. Whistle
blowing technique (Norreklit, 2000; Kaplan and Norton, 1996a) are in existence
encouraging employees to anonymously report any quality concerns.
5.2.3.3 Post audit. In rare circumstances, subsequent events or errors were detected
following the firm successfully completing the engagement and the report issued;
“should such situation occur the reasons thereof would be severely investigated,
employees penalized and the report amended” assured the quality manager. Each
manager’s work is peer reviewed via the quality control department and executive
partners. Checklists compare the planned with actual times taken for every activity and
any variation investigated. Total cost of each engagement is not straightforwardly
measured yet costs such as travel time or other expenses are documented. A detailed
checklist relays each relevant standard and whether it was in fact complied with.
5.2.4 Clients. Clients’ satisfactions are not comprehensively measured. No formal or
official records are prepared to indicate satisfaction since the firm claims it can “tell” if
clients are satisfied through increase in their numbers, referrals, gratitude letters
received from clients […], etc. Consequently, this part investigates whether the missing
measures identified in a BSC would be practical.
5.2.4.1 Customers’ satisfaction. The idea of feedback forms was again rejected in
Egypt “I would be harming my firm rather than helping it” confirmed the partner.
Client’s complaints could be easily tracked and documented through the individual
contacted within the client organizational structure. The firm already ensures that the
audit partners as well as the audit managers themselves are always available for any
inquiries or requests. The firm evaluates and continuously assures following the plans
it formulated and its clients approved to. Timely updates are provided from the audit
partner to the client as well as to the partners especially every “Saturday”. Also, the
managing partner of every engagement acts as its “liaison” partner. Additionally, all
clients are given a list of other numbers to contact should they have any queries. The
firm sets the fees and periodically request raising them which if the client approves this
is interpreted as an appreciation of its efforts. Although not one of the Big 4 yet still
recognized and clients “aware” of it for being owned by a respectable, prominent
Egyptian figure.
5.2.4.2 Clients’ growth and retention. The firm keeps records of all its clients and
calculates total sales and variety of services offered to the same client over the years.
However, according to Egyptian laws the audit partner should not retain the same
customer for more than seven years or five years if the client is a bank. The executives
partners know how many new clients are contracted yet consider it needless to calculate
a percentage of that. The firm believes in “spill over” or “words of mouth” effect where its
reputation and service quality drives in more customers and it enquires into means those
customers became aware of it. Formal documents are kept of tendering participated,
those won or lost so partners have full awareness of such tenders and the reasons behind
the firm failing to win such service opportunities. This firm too does not approve of using
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market share “we are a medium firm, comparing us with the rest of the market is
unrealistic. If we are to compare our ‘share’ we wouldn’t look at the market as a whole but
compare it with firms the same size as us i.e. benchmarking” (Womack et al., 1990; Camp,
1989). Partners are conscious of and rigorously explore reasons for lost clients if the firm
did not voluntarily terminate the relation, thus views it redundant to prepare separate
records for this. The firm consents to the use of client’s number as measure of success.
It counts the number of new clients each year and employs several strategies to increase
them, as previously outlaid.
5.2.5 Financials. The lack of a comprehensive financial measurement system was
explained with two reasons. First, being a medium-sized audit firm thus the
employment of personnel specifically for keeping financial records was viewed as
“useless and not worth it” by both the partner and quality control manager since
partners themselves could easily perform that job. Second, as it is a private family
owned business, the partners wish all their financials to remain confidential among
only family members. Nonetheless, the partner was generous enough to discuss how he
financially measures the performance at his office and allow viewing of confidential
supporting documents. He stated “I prepare a list of total revenues received from each
client, decompose total revenues into its constituents from audit, tax, review and
consultancy services and compare those with last year’s to determine growth, revenue
from each service is matched against its expenses including applicable taxes to
calculate its profits and again compare it with last year and a monthly statement of all
expenses is prepared. My expenses are mostly salaries, printing, photocopying and
marketing”. With respect to the practicality and viability to apply a BSC measures he
stated that budgets are planned for recruiting, developments, training, salaries and
other expenditures each year. Feedback controls are achieved by him comparing those
figures to the budgets or to last year’s results. He noted that “growth in fees is directly
estimated by me as explained. Any relevant profitability or liquidity ratios I need are
calculated by me”. The partner further emphasized that he could estimate the
profitability of individual engagements based on the above analysis. He is also aware of
his receivables and tries to minimize them.
6. Conclusions
This paper aimed at answering a number of research questions:
RQ3. What challenges face auditing firms in designing and applying performance
measurement system compared to other industries?
RQ4. Is the BSC a viable, practical and valid strategic management control tool for
auditing firms and are targets set for measures?
Several findings emerged from the study. First, based on the results of the case studies,
interviews, documents analysis and observations in two Egyptian auditing firms, the
performance measurement systems analysed showed that a BSC would be viable yet its
application varies from large to medium size firms. Large auditing firms with
comprehensive performance systems may already adopt a system resembling BSC since
most of the elements can be measured though it may not necessarily be called a BSC.
This was the case in the Big 4 auditing firm studied. Though they adopted a performance
measurement system which has some of the features of a BSC, this was not called so.
Medium size audit firms are, however, unlikely to adopt such a comprehensive system
and may partially measure some of its elements suggesting that size and perhaps even
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ownership structure affects choice of performance measures (Hoque, 2003; Sousa and
Aspinwall, 2010). The medium size firm studied did not have a comprehensive
performance measurement approach and because it is a family owned firm, there was
also a high degree of confidentiality in its performance measurement. Despite its size,
however, the medium size firm too did show interest in the concept of the BSC and
confirmed to its practicality. Thus it can be concluded that both large and medium size
firms can use the BSC though some adaptation would be required to make it useful to
individual organizations. Therefore, although the BSC is a Western concept yet is still
applicable to an Eastern context such as Egypt with some changes and more
understandings by those responsible for the design and implementation of such measure.
Second, contrary to the well documented argument of firms relying more on
financial rather than non-financial measures of performance ( Johnson and Kaplan,
1987; Joshi et al., 2003; Abdel Kader and Luther, 2006; Blackwell et al., 1994) the
research found that the studied firms rely predominantly on non-financial measures.
There was therefore minimal use of financial indicators. The indicators used resemble
those in the learning and growth and internal business process perspectives of a BSC.
Evidence obtained during the study suggests this may be due to the nature of auditing
services which require the use of highly qualified professionals and quality audit
processes to deliver an appropriate audit report.
Third, the heavy regulations and tightening of standards around auditors force
auditing firms to be preoccupied with satisfying those standards first and before they
start considering their customer satisfaction and financials. Further, audit firms
cannot “satisfy” clients like any other industry would since they have to issue the
appropriate audit report irrespective of client’s “satisfaction” with it. Moreover,
auditing is a service which, in comparison with manufacturing, is more challenging to
value being intangible, perishable and heterogeneous thus emphasis is placed more
on service quality rather than quantity or cost (Fitzgerald and Brignall, 1991).
In effect there was less need for financial and customers’ measures in the firms.
In addition to the industry specific reasons identified above the nature of the
Egyptian environment could also be argued to have influenced the non-reliance on
financial and customers’ measures in the studied firms. Some firms in Egypt desire
their financials to remain confidential to owners only thus no comprehensive or
formal systems are used to measure them. Similarly, Egyptian customers are quality
conscious who become suspicious if firms try to measure satisfaction rather than
understand it is actually to satisfy them (as indicated by interviews responses
discussed in Section 5).
Fourth, the forms of the performance measurements systems including possible
BSC used by the auditing firms presented a tool by which partners and audit managers
and supervisors assessed the performance of employees within the auditing firm and
got a feedback about problems encountered during the fieldwork tests. Continuous
meetings were held between partners and employees where discussions about how
employees are achieving the targets represented in deadlines for completing the
assignments, meeting customers’ needs in terms of quality, best use of the firm’s
resources and maintaining a good relationship with customers to ensure the renewal of
the engagement in future periods. In the medium size auditing firm, Saturdays were
selected for follow up and feedback discussions between partners and employees to
identify deficiencies and problems encountered during the audit. Such findings support
arguments and results identified by Kaplan and Norton (1996a, b), Malmi, (2001),
Norreklit, (2000) and Jazayeri and Scapens (2008).
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Fifth, the advisor to the chairman of the Big 4 as well as partners in medium size
firm confirmed that the performance measurement systems used included a monitoring
internal process by which the firm assesses the quality of its services. Targets were set
by partners and performance measured with the aid of a set of forms and checklists
including both financial and non-financial measures reducing the need for the use of
the traditional budget especially in the medium size audit firm. The above results
confirm Malmi (2001) argument that BSCs or similar systems have been developed
independently of the budgeting process to help control a company activities as part of
its performance management system. Also, the performance system in auditing firms
supported Kaplan and Norton (1996a) belief that in most organizations the strategic
planning and budgeting processes were separate.
The research offers a number of contributions to the accounting literature. First, the
research highlighted a number of challenges facing auditing firms with their unique
characteristics represented in: first, the need for advanced sound information systems
to record and assess performance measures in particular when using a BSC in addition
to other audit tools; second, training as an important element of success for such firms
with the costs associated with implementing internal and external training programs;
third, high turnover of employees with negative impact on the efficiency and
effectiveness by which quality and deadlines of services provided are achieved; fourth,
the subjectivity in measuring the firms’ growth and problems related with assessing
the firms’ share in the professional market; fifth, the need to develop new services
without being considered in violation of the requirements of laws and regulations and
auditing standards for non-audit services; sixth, the pressure faced by the auditing
firms to meet the requirements imposed by international CPA firms needed to
maintain their international affiliation and related financial and business benefits;
and finally, the subjectivity embedded in assessing customers’ satisfaction and what
are considered acceptable measures to achieve such objective which is the core of the
professional firms’ business success.
Second, the research enriches the literature of performance measurement systems in
services. Though studies have been conducted into performance measurement systems,
the majority of these studies are from the manufacturing sector leaving a gap for studies
in services (Fitzgerald and Brignall, 1991; Malmi, 2001; Jazayeri and Scapens, 2008).
Third, large institutions and their prevailing practices have been thoroughly investigated
yet comparable studies for performance evaluations in medium and small size firms are
lacking (Hudson et al., 2001). This research discussed in one of its case studies
performance measurement practices within a medium size audit firm.
A number of limitations are associated with the current research. First, the research
examined only two case studies.While this might impose some limitations on the ability
to generalize the results to all auditing firms in Egypt, the tentative conclusions drawn
from the study highlighted certain issues that may be relevant in understanding
performance measurement in the industry. Case studies are time consuming to conduct,
a problem faced with this research which affected the number of auditing firms
investigated. Although, access to a suitable case may not be granted (Bryman and Bell,
2007), the researchers had access to two of the most reputable firms in Egypt. Thus, the
problem of generalizing the results to other entities on the grounds that the case object
may not be typical or representative to the whole industry (Brown, 1998; Saunders et al.,
2007; Bryman and Bell, 2007), may not be true as the analysis of performance measures
and possible application of a BSC from case studies on a large and medium size audit
firms are representative of other similar entities operating in the same industry.
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BSC is a strategic management tool worthy of adoption. BSC requires considerable
amount of time and money for effective implementation therefore it may be necessary
to conduct a cost/benefit analysis which if proved favourable auditing firms should
gradually adopt it and introduce necessary changes to its current performance
systems. Models are needed to better understand how business performance is
developed and as argued by Norreklit (2000); this is where management accounting
research has to make significant contribution to the literature. Finally, more research is
needed to continue to explore the concept of coherence in performance measurement
systems and in particular the BSC when such tools are implemented in auditing firms,
and to examine the extent to which it could be helpful to understand the viability of
applying the BSC for auditing firms and, in particular, the use of non-financial
measures. The question remains whether the concept of coherence will be equally
important in developing non-financial performance measures in other contexts, and
this question awaits further research as indicated by the current research and findings
of Jazayeri and Scapens (2008).
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Corresponding author
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