How do Auditors Respond to CEO Narcissism? Evidence from External Audit Fees

Posted: 13 May 2015 Last revised: 30 Aug 2018

See all articles by J. Scott Judd

J. Scott Judd

University of Illinois at Chicago

Kari Olsen

Utah Valley University

James Stekelberg

Colorado State University, Fort Collins - Department of Accounting

Date Written: March 9, 2017

Abstract

Prior research on CEO narcissism has focused on outcomes related to the CEO’s firm. We extend this literature by examining how an important counterparty—the firm’s external auditor—responds to a client having a more narcissistic CEO. Compared to other firms, firms with narcissistic CEOs are more likely to exhibit greater inherent risk and control risk. To maintain an acceptable level of audit risk when faced with the heightened risk of CEO narcissism, auditors must do additional work. Consistent with this notion, we find that CEO narcissism has an economically and statistically significant positive effect on external audit fees, indicating that auditors work more, charge a risk premium, or both when auditing a client with a more narcissistic CEO. We also find that firms with narcissistic CEOs are more likely to have internal control weaknesses, which suggests a possible mechanism for why auditors might need to perform more work. This is the first study to provide large-sample real-world evidence on how auditors respond to CEO narcissism and demonstrates the significant effect that executive personality characteristics can have in an audit setting.

Keywords: Audit Risk; Auditor Resignations; Audit Fees; Executive Personality Traits; Narcissism

Suggested Citation

Judd, Joshua and Olsen, Kari and Stekelberg, James, How do Auditors Respond to CEO Narcissism? Evidence from External Audit Fees (March 9, 2017). Accounting Horizons 31 (4): 33-52. Available at SSRN: https://ssrn.com/abstract=2605172 or http://dx.doi.org/10.2139/ssrn.2605172

Joshua Judd

University of Illinois at Chicago ( email )

601 S Morgan St. 2302 UH
Chicago, IL 60607
United States

Kari Olsen

Utah Valley University ( email )

800 West University Parkway
Orem, UT 84058
United States

James Stekelberg (Contact Author)

Colorado State University, Fort Collins - Department of Accounting ( email )

256 Rockwell Hall
Fort Collins, CO 80523
United States

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