Seeing Is Believing? Executives’ Facial Trustworthiness, Auditor Tenure, and Audit Fees
Forthcoming at Journal of Accounting and Economics.
58 Pages Posted: 23 Aug 2019
Date Written: August 21, 2019
Psychology and neuroscience studies document that facial trustworthiness perceptions may affect observers’ decision-making process. Our study examines whether auditors’ perceptions of client executives’ facial trustworthiness are associated with their audit fee decisions. We employ a machine-learning-based face-detection algorithm to measure executives’ facial trustworthiness. We find that auditors charge 5.6% less audit fee to firms with trustworthy-looking CFOs than to those with untrustworthy-looking CFOs in initial audit engagements. Auditor tenure weakens the negative association between CFOs’ facial trustworthiness and audit fee. Further evidence shows that CFO’s facial trustworthiness is associated with neither financial reporting quality nor litigation risk.
Keywords: Facial trustworthiness, CFO, audit fee, auditor tenure, cognitive bias
JEL Classification: D81, D83, D91, M12, M42
Suggested Citation: Suggested Citation