Chief Audit Executive Turnover: Market Reactions, Financial Reporting Quality, and Audit Risk Assessment

43 Pages Posted: 7 Oct 2019 Last revised: 4 Aug 2020

See all articles by Kenneth L. Bills

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems

Hua‐Wei Huang

National Cheng Kung University - Accounting

Yi-Hung Lin

Monash University

David A. Wood

Brigham Young University - School of Accountancy

Date Written: August 3, 2020

Abstract

We understand relatively little about factors that affect the internal audit function’s ability to serve as an important monitor of financial reporting quality. We therefore study how turnover of the chief audit executive (CAE) influences financial reporting quality and stakeholders’ perceptions. Using data from Taiwan where companies are required to disclose when CAEs change position, we study how investors react to the announcement of a CAE turnover event, whether financial statements are of higher or lower quality after the turnover event, and how external auditors change their pricing behavior after the turnover event. We find that a CAE turnover event is associated negative stock mark reactions, a reduction in financial reporting quality, and higher external audit fees. Combined, the results provide evidence of the important monitoring role of internal auditing and especially of the critical role of the CAE.

Keywords: internal auditor turnover, financial reporting quality, audit risk, chief audit executive (CAE)

JEL Classification: M4, M40, M41, M42, G30

Suggested Citation

Bills, Kenneth L. and Huang, Hua-Wei and Lin, Yi-Hung Jerry and Wood, David A., Chief Audit Executive Turnover: Market Reactions, Financial Reporting Quality, and Audit Risk Assessment (August 3, 2020). Available at SSRN: https://ssrn.com/abstract=3464557 or http://dx.doi.org/10.2139/ssrn.3464557

Kenneth L. Bills

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

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

Hua-Wei Huang

National Cheng Kung University - Accounting ( email )

1 Ta-Hsueh Road
Tainan, 701
Taiwan

Yi-Hung Jerry Lin

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

David A. Wood (Contact Author)

Brigham Young University - School of Accountancy ( email )

518 TNRB
Brigham Young University
Provo, UT 84602
United States
801-422-8642 (Phone)
801-422-0621 (Fax)

HOME PAGE: http://marriottschool.byu.edu/employee/employee.cfm?emp=daw44

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