The Relation between Managerial Ability and Audit Fees and Going Concern Opinions

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 to auditors. We examine the relation between managerial ability, i.e., ability in transforming corporate resources to revenues, and audit fees and a going concern opinion. We use the managerial ability measure recently developed by Demerjian, Lev, and McVay (2012). We find that incremental to firm-level attributes, both audit fees and the likelihood of issuing a going concern opinion are decreasing in managerial ability. Collectively, our findings support the notion that managerial ability is relevant to auditors' decisions.

Evidence on the relation between managerial ability and financial reporting timeliness

“…We contend that managerial ability, as increases, reduces the amount of time needed to sufficiently discuss, comprehend, and evaluate significant accounting policies and unusual transactions with the auditor (Salterio, ), thereby reducing ARL. Further, the results of Krishnan and Wang () support our prediction, as they find that auditors assess clients with higher managerial ability as having lower audit engagement risk.…”

“…As a result, managers with greater ability will be able to effectively and efficiently facilitate both the financial reporting process and the audit. These efficiencies could manifest in shorter ARL because the verification and confirmation of this information will be made in a more timely fashion because communication between the auditor and management, which is fundamental to the audit process, will be facilitated (Krishnan & Wang, ; Salterio, ). We contend that managerial ability, as increases, reduces the amount of time needed to sufficiently discuss, comprehend, and evaluate significant accounting policies and unusual transactions with the auditor (Salterio, ), thereby reducing ARL.…”

Optimistic tone and audit fees: Some Australian evidence

“…We expect the natural logarithm of total assets ( SIZE ) to be positively associated with audit fees ( LAF ). We also include firm age ( AGE ) as a control variable, measured as the natural logarithm of the (Krishnan & Wang, ) company as a listed firm, but we do not predict a sign for the coefficient for this variable due to lack of compelling argument to do so.…”

Managerial Ability and Credit Ratings

“…Since then, researchers have focused primarily on observable CEO characteristics including early life experiences, education, military service, personal investment style, and physical traits such as gender and height. 6 Existing literature examining the impact of managers on investment policy (e.g., Bertrand and Schoar 2003;Benmelech and Frydman 2015), financial policy (Pan, Wang, and Weisbach 2014), firm performance (Adams et al 2005;Andreou, Ehrlich, Karasamani, and Louca 2015), initial public offerings (Chemmanur and Paeglis 2005), compensation (Graham, Li, and Qiu 2012;Cust odio and Metzger 2013), accounting choices (Bamber, Jiang, and Wang 2010;Ge, Matsumoto, and Zhang 2011;Demerjian et al 2013;Demerjian, Lewis, and McVay 2016), corporate tax policy (Dyreng, Hanlon, and Maydew 2010;Koester, Shevlin, and Wangerin 2016) and auditor decisions (Krishnan and Wang 2015).…”