The impact of CEO and CFO equity incentives on audit scope and perceived risks as revealed through audit fees
01 Apr 2014-Auditing-a Journal of Practice & Theory (American Accounting Assocation)-Vol. 33, Iss: 2, pp 111-139
TL;DR: In this article, the authors use the association between audit fees and CEO and CFO equity incentives to infer whether auditors increase audit scope and perceive greater risk as equity incentives increase.
Abstract: SUMMARY: In 2013, the Public Company Accounting Oversight Board (PCAOB) proposed an amendment to Auditing Standard No. 12 (PCAOB 2010) that would require auditors to consider executive compensation in audit planning because of potential fraud risk associated with equity incentives. We use the association between audit fees and CEO and CFO equity incentives to infer whether auditors increase audit scope and perceive greater risk as equity incentives increase. Equity incentives are defined as the sensitivity of the value of executives' equity portfolios to changes in share price (delta incentive) and to changes in return volatility (vega incentive). We find a positive association between audit fees and vega, but not delta. However, when we interact vega with proxies for residual auditor business risk, we find that the fee premiums for risk decrease as vega increases. Our results suggest that auditors do consider executive compensation in audit planning.
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TL;DR: This paper examined the relation between firm-level attributes and auditors' decisions and found that there is little empirical evidence on whether managerial attributes are informative or informative in terms of auditing decisions.
Abstract: SUMMARY: While prior research has examined the relation between firm-level attributes and auditors' decisions, there is little empirical evidence on whether managerial attributes are informative t...
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Cites result from "The impact of CEO and CFO equity in..."
...Our study, therefore, extends the auditing literature documenting the impacts of executives' individual characteristics on audit fee (Harjoto et al., 2015; Hrazdil et al., 2018; Judd et al., 2017; Kannan et al., 2014; Kim et al., 2015)....
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TL;DR: In this article, the authors investigate the association between managerial overconfidence and audit fees, as well as the effect of a strong audit committee on this relation and find that companies with overconfident managers have a lower likelihood of using a city-industry specialist auditor.
Abstract: We investigate the association between managerial overconfidence and audit fees, as well as the effect of a strong audit committee on this relation Overconfident managers tend to overestimate their ability and the future payouts of projects but underestimate the likelihood and impact of adverse events Auditors may therefore charge a fee premium to compensate for the additional audit effort due to the increased audit risk Conversely, overconfident managers may demand less audit services due to either hubris in their companies’ financial reporting or a desire to reduce auditor scrutiny over aggressive accounting A strong audit committee can alleviate the audit risks associated with managerial overconfidence or prevent overconfident managers from reducing audit services thus mitigating the relation between audit fees and managerial overconfidence We find robust evidence of a negative relation between managerial overconfidence and audit fees for companies lacking a strong audit committee However, in the presence of a strong audit committee the negative relation is mitigated In additional analysis, we also find that companies with overconfident managers have a lower likelihood of using a city-industry specialist auditor
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TL;DR: In this article, the authors examine whether CEOs' work experience in accounting-and finance-related jobs affects audit fees and find that firms that have a financial expert CEO pay lower audit fees.
Abstract: SYNOPSIS: Accounting scholars theorize that audit price is a function of a client's audit and business risk. Existing research finds that the functional expertise of Chief Executive Officers (CEOs) in finance improves financial reporting quality (Matsunaga, Wang, and Yeung 2013), increases profitability, and reduces the likelihood of firm failure (Custodio and Metzger 2014). These factors suggest that auditors' engagement risk decreases when incumbent CEOs possess financial expertise, raising the likelihood that auditors will charge these firms lower fees. In this study, we examine whether CEOs' work experience in accounting- and finance-related jobs affects audit fees. Using a panel of U.S. firms between 2004 and 2013, we find that firms that have a financial expert CEO pay lower audit fees. Our results are robust to various specifications, including firm-fixed effect model and specifications that control for other CEO- and Chief Financial Officer (CFO)-specific and audit committee characteristics. Our f...
48 citations
TL;DR: In this article, the authors investigate the association between managerial overconfidence and audit fees, as well as the effect of a strong audit committee on this relation, and find evidence of a negative relation between manager overconfidence, audit fees and industry specialist auditor.
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