Performance management

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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