Do CEO Succession and Succession Planning Affect Stakeholders' Perceptions of Financial Reporting Risk? Evidence from Audit Fees

Posted: 30 May 2015 Last revised: 16 Jul 2017

See all articles by Kenneth L. Bills

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business

Timothy A. Seidel

Brigham Young University

Date Written: August 1, 2016

Abstract

In this paper, we examine how CEO succession and succession planning affect perceptions of financial reporting risk among stakeholders who are responsible for and oversee firms’ financial reporting (e.g., auditors, management, and audit committees). Management succession introduces uncertainty about firms’ future operations, financial policies, and potential motivation for earnings management, which we predict elevates the perceived risk of financial reporting improprieties. Consistent with this prediction, we find that audit fees are higher for firms with new CEOs. Importantly, however, we note that careful CEO succession planning (i.e., promoting an “heir apparent”) attenuates perceptions of higher risk as evidenced by a lack of an audit pricing adjustment. These results are robust to several alternative specifications and analyses designed to mitigate the concern that the association between audit fees and CEO succession and succession planning is driven by factors leading to the CEO change. We also show that audit fee increases dissipate over time as the new, non-heir CEO stays longer at the firm, reinforcing the inference that audit fees increase in response to the uncertainty surrounding a new CEO. Additionally, we do not find evidence of a deterioration in audit quality with new CEOs, independent of the succession plan.

Keywords: CEO succession, succession planning, financial reporting risk, audit fees, heir apparent, insider CEO

JEL Classification: G30, M12, M41, M42

Suggested Citation

Bills, Kenneth L. and Lisic, Ling Lei and Seidel, Timothy A., Do CEO Succession and Succession Planning Affect Stakeholders' Perceptions of Financial Reporting Risk? Evidence from Audit Fees (August 1, 2016). Accounting Review, Vol. 92, No. 4, 2017. Available at SSRN: https://ssrn.com/abstract=2611798 or http://dx.doi.org/10.2139/ssrn.2611798

Kenneth L. Bills (Contact Author)

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States

Timothy A. Seidel

Brigham Young University ( email )

Provo, UT 84602
United States

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