CEO turnover and audit pricing: the role of media tone

Abstract

Purpose Prior research documents that chief executive officer (CEO) characteristics and succession planning affect audit fees. However, whether new CEOs’ media coverage influences audit fees remains unexplored. This study aims to fill this gap by examining whether auditors price media coverage of the new CEO. Design/methodology/approach The sample comprises 89 US listed firms with CEO turnover over the period 2012–2016, resulting in a total of 445 firm-year observations. Panel data models are used in the analyses. Findings The results show that audit fees are higher for firms that hire a new CEO covered with more negative media tone. This study further documents that CEO media tone is determined independently of audit pricing, but that the extent of audit fees is positively related to a new CEO covered with more negative media tone, consistent with a sequential media-tone-then-audit-pricing process. Research limitations/implications The results of this study should motivate future auditing research to consider the media as an important source of external information. The findings are also relevant to stakeholders who are interested in understanding the relationship between auditors and their clients’ CEOs. Originality/value This study contributes to the audit fee literature by providing new evidence that auditors view their clients’ CEO with a negative media tone as requiring greater audit effort and leading to higher risks, due to greater public and regulators’ attention conveyed in news coverage. Moreover, the finding of this study that audit fees are higher for firms that hire a new CEO covered with more negative media tone is novel, and extends Joe’s (2003) empirical finding that negative press coverage increases auditors’ perception of risk.

Busy CEOs and audit fees: evidence from Indonesia

“…First, it enriches the existing business research by providing empirical evidence showing that busy CEOs are capable of managing the effectiveness of their business operations, which causes a significant increase in audit fees. In addition, our study contributes to the literature examining the association between director characteristics and audit fees in countries that have adopted the one-tier system (Cai and Li, 2022; Chao, 2022; Fernández-Méndez and Pathan, 2022). Specifically, our research offers a novel insight by investigating the impact of busy directors on audit fees in a two-tier system.…”

“…Some previous studies have found that busier directors may increase the audit fee significantly (Fredriksson et al , 2020), whereas others have reported no relationship between busy directors and audit fees (Fernández Méndez et al , 2015). Other prior research has shown that different characteristics of the directors, such as female directors (Fernández-Méndez and Pathan, 2022), CEO turnover (Chao, 2022), tenure (Cai and Li, 2022) and directors’ compensation, are related to favorable audit fees.…”

“…Previous research has found that some characteristics of the directors can influence the higher audit fee devoted to the quality audit provided by the auditor. Female directors (Fern andez-M endez and Pathan, 2022), CEO turnover (Chao, 2022), tenure (Cai and Li, 2022) and directors' compensation (Sharma et al, 2021) are related to favorable audit fees. Therefore, directors are vital in influencing the audit fees.…”