Is the CEO’s In-House Experience Informative About Audit Risk?

Abstract

Very little is known about whether personal characteristics of senior managers convey information about audit risk. We focus on one characteristic of the CEO, the number of years the CEO has worked in the firm before becoming the CEO (CEO in-house experience). We posit that the CEO’s in-house experience mitigates audit risk due to less uncertainty and more familiarity with the auditor. Using audit fees to proxy for audit risk, we find that audit fees are decreasing in CEO’s in-house experience. On average, audit fees are lower by 10% when CEO in-house experience changes from 2 to 6 years. Further, the relation between audit fees and the CEO’s in-house experience is conditional on the overall quality of corporate governance. While the CEO’s in-house experience is insignificant in firms with good governance, it is strongly significant in firms with weak governance.

Keywords: CEO succession, audit fees, audit risk, corporate governance

JEL Classification: M42, G30, G34