Performance measurement systems in auditing firms : Challenges and other behavioural aspects

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. 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.