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

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