Do Audit Fees Reflect Unique Characteristics of Individual Executives?

Accounting Horizons (forthcoming)

Posted: 5 Aug 2015 Last revised: 23 Jul 2020

See all articles by John Lauck

John Lauck

Louisiana Tech University - School of Accounting & Information Systems

Joseph Rakestraw

Florida Atlantic University - School of Accounting

Sarah E. Stein

Virginia Tech

Date Written: May 14, 2020

Abstract

We examine whether audit fees reflect characteristics of individual executives incremental to known determinants of fees. Using a novel executive effects approach, we find that unexplained audit fees exhibit a statistically and economically significant association with executive effects after controlling for factors related to the firm and environment. Specifically, executive effects represent between 20 and 39 percent of the total variation in unexplained audit fees. Our tests also show only limited evidence that observable proxies are associated with the auditor’s perception of an executive’s style, which suggests that our analysis identifies unobservable traits that cannot be captured by typical measures in archival research (e.g., gender, age, educational background, and board membership). Collectively, our study highlights the importance of executive characteristics in the determination of audit fees and suggests that future research may benefit from additional consideration of individual executives’ influence on the pricing of audit services.

Keywords: executive fixed effects; group connection; audit pricing; unexplained audit fees

JEL Classification: M41, M42

Suggested Citation

Lauck, John and Rakestraw, Joseph and Stein, Sarah E., Do Audit Fees Reflect Unique Characteristics of Individual Executives? (May 14, 2020). Accounting Horizons (forthcoming), Available at SSRN: https://ssrn.com/abstract=2639777 or http://dx.doi.org/10.2139/ssrn.2639777

John Lauck

Louisiana Tech University - School of Accounting & Information Systems ( email )

P. O. Box 10318
Ruston, LA 71272
United States

Joseph Rakestraw

Florida Atlantic University - School of Accounting ( email )

777 Glades Blvd
Kaye Hall (KH-25) Suite 119
Boca Raton, FL 33431
United States
561-297-3008 (Phone)

Sarah E. Stein (Contact Author)

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

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