Are Audit Partners Rewarded for Selling Consulting Services to Audit and Non-Audit Clients?

Are audit partners rewarded for the revenues they generate by selling consulting services? The question is relevant because of the concern that audit firms have focused on consulting services that are more lucrative and have higher margins than auditing, and that the profit orientation may have impaired audit quality. Using novel data on the revenue streams that partners generate by selling consulting services to non-audit clients as well as to audit clients and their personal income, we are the first to shed light on this question. Specifically, we use partner level data and examine whether partners that generate higher revenues from consulting services to non-audit clients and to audit clients are better compensated while at the same time accounting for audit revenues obtained from audit clients and other control variables. A positive relation between partners' income and revenues from consulting indicate that audit firms prioritize consulting by rewarding partners for sales of consulting services. The results, based on 641 partner-year observations from Norwegian Big-5 firms, show that partners' compensation is positively associated with revenues from consulting services to non-audit clients, but not those to audit clients. We acknowledge that endogeneity is a major challenge for this type of studies, which suggests that results should be interpreted with caution.