Do Audit Fees Reflect Unique Characteristics of Individual Executives?

Abstract

We examine whether audit fees reflect characteristics of individual executives incremental to known determinants of fees. Using a novel executive effects approach, we find that unexplained audit fees exhibit a statistically and economically significant association with executive effects after controlling for factors related to the firm and environment. Specifically, executive effects represent between 20 and 39 percent of the total variation in unexplained audit fees. Our tests also show only limited evidence that observable proxies are associated with the auditor's perception of an executive's style, which suggests that our analysis identifies unobservable traits that cannot be captured by typical measures in archival research (e.g., gender, age, educational background, and board membership). Collectively, our study highlights the importance of executive characteristics in the determination of audit fees and suggests that future research may benefit from additional consideration of individual executives' influence on the pricing of audit services.

Association between executives’ foreign background and audit fees

“…Therefore, executives influence the control environment and firm culture. As a result, individual executive characteristics significantly impact audit engagement fees (Lauck et al , 2020). Given that foreign backgrounds affect personal values and cognitive patterns, the heterogeneous characteristic of executives would have different impacts on audit fees than that of local executives.…”

“…The firm’s decision-making process requires advice from each executive. Executive heterogeneity affects firm behavior and may affect external audits in areas such as managers’ behaviors, internal controls and financial reporting (Adams and Ferreira, 2009; Lauck et al , 2020). In recent years, many management talents studying or working in developed countries have returned to their home countries (Harrington and Seabrooke, 2020; Kenney et al , 2013).…”

The Influence of Management's Internal Audit Experience on Earnings Management*

“…Prior research suggests that defining, executing, and overseeing an organization's strategy is a shared activity among executives and managers (Hambrick and Mason 1984; Hambrick 2007) and that views from a variety of executives and managers can matter in financial reporting contexts (Zhang 2019; Lauck et al 2020; Wells 2020; Bills, Harding, et al 2021). However, the potential influence these individuals wield should be a function of their power within the organization (D'Aveni 1990; Grinstein and Hribar 2004; Pollock et al 2010; Badolato et al 2014; Beck and Mauldin 2014; Ege et al 2021).…”

Relação entre o CEO narcisista e os honorários de auditoria

“…, o risco do cliente, percebido pelos auditores (CASTRO; PELEIAS; SILVA, 2015; GOTTI; HAN; HIGGS;KANG, 2011;JUDD, OLSEN;STEKELBERG, 2017), a personalidade do alto executivo(APOSTOLOU et al, 2013;JUDD;STEKELBERG, 2017;LAUCK;RAKESTRAW;STEIN, 2020), o tipo de firma de auditoria (CASTRO; PELEIAS;SILVA, 2015;HALLAK;SILVA, 2012;JUDD;STEKELBERG, 2017), o comitê de auditoria (HALLAK; SILVA, 2012; HUDAIB; HANIFFA; ZAMAN, 2011) e a complexidade da empresa(GOTTI et al, 2011;REES, 2013).Entretanto, sob os preceitos da Teoria do Alto Escalão, são raros os estudos abordando a relação entre a personalidade do alto executivo e os honorários de auditoria. Assim, as pesquisas mencionadas no parágrafo anterior, entre outras, são apresentadas a seguir, relacionando-as com os construtos deste estudo Apostolou et al (2013).…”