CEO Financial Background and Audit Pricing

Posted: 19 Aug 2014 Last revised: 24 Aug 2016

See all articles by Rachana Kalelkar

Rachana Kalelkar

University of Houston - Victoria

Sarfraz Khan

University of Louisiana at Lafayette

Date Written: 2016

Abstract

Accounting scholars theorize that audit price is a function of a client's audit and business risk. Existing research finds that the functional expertise of Chief Executive Officers (CEOs) in finance improves financial reporting quality (Matsunaga, Wang, and Yeung 2013), increases profitability, and reduces the likelihood of firm failure (Custodio and Metzger 2014). These factors suggest that auditors' engagement risk decreases when incumbent CEOs possess financial expertise, raising the likelihood that auditors will charge these firms lower fees. In this study, we examine whether CEOs' work experience in accounting- and finance-related jobs affects audit fees. Using a panel of U.S. firms between 2004 and 2013, we find that firms that have a financial expert CEO pay lower audit fees. Our results are robust to various specifications, including firm-fixed effect model and specifications that control for other CEO- and Chief Financial Officer (CFO)-specific and audit committee characteristics. Our findings thus add to the literature on the advantages and disadvantages of a functional background of top managers and how this background can create value for a firm through savings in audit fees.

Keywords: CEO financial expertise, audit fees

JEL Classification: J24, M41

Suggested Citation

Kalelkar, Rachana and Khan, Sarfraz, CEO Financial Background and Audit Pricing (2016). Accounting Horizons, Vol. 30, No. 3, 2016, Available at SSRN: https://ssrn.com/abstract=2482805

Rachana Kalelkar (Contact Author)

University of Houston - Victoria ( email )

United States

Sarfraz Khan

University of Louisiana at Lafayette ( email )

Department of Accounting
214 Hebrard Blvd.
Lafayette, LA 70508
United States

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