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CEO tenure and audit pricing

Title
CEO tenure and audit pricing
Author
권신형
Keywords
CEO tenure; Audit fees; Risk of fnancial misstatements; Earnings management
Issue Date
2020-08
Publisher
Springer New York LLC
Citation
Review of Quantitative Finance and Accounting, v. 55, no. 2, page. 427-459
Abstract
We examine the relationship between CEO tenure and audit fees. After controlling for client and auditor attributes in the analyses, we find that audit fees are higher in the initial 3 years of CEOs’ service, suggesting that CEOs in their early career are more likely to show high risk-taking behavior and manage earnings that increases the probability of financial misreporting. Auditors incorporate this risk in their audit pricing decisions resulting in higher audit fees. We also find that audit fees are higher in the final year of CEOs’ service, supporting the argument for departing CEOs’ horizon problem that CEOs in their final year are more likely to manage earnings, and auditors perceive this action as increasing reporting risk in their audit pricing decisions, resulting in higher audit fees. However, the firms with more effective audit committees pay relatively lower audit fees in initial years of CEOs’ service indicating that effective audit committees reduce auditors’ assessed risk during this time-period resulting in lower audit fees. We do not find any evidence on the effect of firms’ CFO power and corporate social responsibility performance on audit fees in these two time-periods of CEOs’ service. The main results hold in a battery of supplemental tests that include the effect of several CEO characteristics, client bargaining power and the effect of SOX. Our study extends CEO characteristics and audit fee literature, and have implications for auditors in their client acceptance and audit pricing decisions, and for regulators to identify the filers with higher financial reporting and audit engagement risk.
URI
https://link.springer.com/article/10.1007%2Fs11156-019-00848-xhttps://repository.hanyang.ac.kr/handle/20.500.11754/164760
ISSN
1573-7179; 0924-865X
DOI
10.1007/s11156-019-00848-x
Appears in Collections:
COLLEGE OF BUSINESS AND ECONOMICS[E](경상대학) > ACCOUNTING AND TAX(회계세무학과) > Articles
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