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Do Auditors Respond to Management Uncertainty? Evidence from Audit Fees

Authors :
Ling Lei Lisic
Timothy A. Seidel
Kenneth L. Bills
Source :
SSRN Electronic Journal.
Publication Year :
2015
Publisher :
Elsevier BV, 2015.

Abstract

In this paper, we examine how CEO succession and succession planning affect perceptions of financial reporting risk among stakeholders who are responsible for and oversee firms’ financial reporting (e.g., auditors, management, and audit committees). Management succession introduces uncertainty about firms’ future operations, financial policies, and potential motivation for earnings management, which we predict elevates the perceived risk of financial reporting improprieties. Consistent with this prediction, we find that audit fees are higher for firms with new CEOs. Importantly, however, we note that careful CEO succession planning (i.e., promoting an “heir apparent”) attenuates perceptions of higher risk as evidenced by a lack of an audit pricing adjustment. These results are robust to several alternative specifications and analyses designed to mitigate the concern that the association between audit fees and CEO succession and succession planning is driven by factors leading to the CEO change. We also show that audit fee increases dissipate over time as the new, non-heir CEO stays longer at the firm, reinforcing the inference that audit fees increase in response to the uncertainty surrounding a new CEO. Additionally, we do not find evidence of a deterioration in audit quality with new CEOs, independent of the succession plan.

Details

ISSN :
15565068
Database :
OpenAIRE
Journal :
SSRN Electronic Journal
Accession number :
edsair.doi...........c3472998fd8fd1543e6ac92dbf4be262
Full Text :
https://doi.org/10.2139/ssrn.2611798