CEO-CFO Compatibility and Audit Engagement Risk

Abstract

Using similarity between CEO and CFO personalities as a proxy for their compatibility, we find that CEO-CFO similarity is negatively associated with audit fees after controlling for other determinants of audit fees from the prior literature. We also find that audit fees increase (decrease) when personality similarity decreases (increases) following turnover in the CEO-CFO team. Further, the effect of CEO-CFO personality similarity on audit fees is mediated by how long the CEO and CFO work together, although the direct effects of personality similarity remain strong. These results are consistent with auditors acting as if compatible CEO-CFO teams reduce engagement risk and, as a result, audit fees.

Keywords: top management team (TMT); audit fees; engagement risk; CEO-CFO harmony and compatibility; personality similarities and differences; auditor tenure

JEL Classification: D81, D83, D91, G41, M12, M42