Managerial Overconfidence and Audit Fees

Journal of Contemporary Accounting and Economics, Forthcoming

49 Pages Posted: 31 Jan 2015 Last revised: 17 Apr 2015

See all articles by Scott Duellman

Scott Duellman

Saint Louis University - Department of Accounting

Helen Hurwitz

Saint Louis University

Yan Sun

Saint Louis University

Date Written: January 28, 2015

Abstract

We investigate the association between managerial overconfidence and audit fees, as well as the effect of a strong audit committee on this relation. Overconfident managers tend to overestimate their ability and the future payouts of projects but underestimate the likelihood and impact of adverse events. Auditors may therefore charge a fee premium to compensate for the additional audit effort due to the increased audit risk. Conversely, overconfident managers may demand less audit services due to either hubris in their companies’ financial reporting or a desire to reduce auditor scrutiny over aggressive accounting. A strong audit committee can alleviate the audit risks associated with managerial overconfidence or prevent overconfident managers from reducing audit services thus mitigating the relation between audit fees and managerial overconfidence. We find robust evidence of a negative relation between managerial overconfidence and audit fees for companies lacking a strong audit committee. However, in the presence of a strong audit committee the negative relation is mitigated. In additional analysis, we also find that companies with overconfident managers have a lower likelihood of using a city-industry specialist auditor.

Keywords: Overconfidence, Audit Fees, Specialist Auditor, Audit Committee

JEL Classification: G32, M41

Suggested Citation

Duellman, Scott and Hurwitz, Helen and Sun, Yan, Managerial Overconfidence and Audit Fees (January 28, 2015). Journal of Contemporary Accounting and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2557494 or http://dx.doi.org/10.2139/ssrn.2557494

Scott Duellman (Contact Author)

Saint Louis University - Department of Accounting ( email )

3674 Lindell Blvd.
St. Louis, MO 63108
United States

Helen Hurwitz

Saint Louis University ( email )

220 North Grand Boulevard
St. Louis, MO 63103
United States
314-977-3841 (Phone)

Yan Sun

Saint Louis University ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States

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