Generalist CEOs and Audit Pricing
Singapore Management University School of Accountancy Research Paper No. 2021-132
AUDITING: A Journal of Practice & Theory Forthcoming
49 Pages Posted: 2 Mar 2021 Last revised: 3 Dec 2021
Date Written: February 6, 2021
Abstract
We analyze the consequences of a firm hiring a generalist CEO in terms of the audit fees paid by the firm. We find that audit fees of clients with generalist CEOs are higher than those of clients with specialist CEOs. This relation is robust to considering managerial ability, other CEO characteristics, various fixed effects, instrumental variables, and change analyses. We further show that fee differences are larger for firms with weaker monitoring and higher corporate litigation risks. Through path analysis, we find that both client business risk and misreporting risk contribute to the fee difference. Finally, we find that auditors are more likely to issue going-concern opinions to clients with generalist CEOs. Our study should be of interest to auditing standard setters who link management operating styles to audit risk. We shed light on how management operating styles associated with the CEOs’ general or specialized skills affect audit pricing.
Keywords: generalist CEOs; managerial skills, audit risk; agency problem
JEL Classification: M41; M42
Suggested Citation: Suggested Citation