CEO-CFO Compatibility and Audit Risk

Abstract

This study examines the influence of CEO-CFO compatibility (proxied by the similarity of their personalities) on audit risk (proxied by audit fees). Relying on similarity-attraction theory, we posit that the alignment of the CEO and CFO’s personalities—specifically their “Big Five” traits—enhances internal communication, information sharing, and decision-making processes within the organization, thereby reducing audit risk associated with a firm’s financial reporting. We test our theory using firm fixed effects and find that greater CEO-CFO personality similarity is associated with reduced audit fees. Further, we find that the tenure of the CEO-CFO relationship partially explains the relation between their personality similarity and audit fees. Finally, we find that the effect of CEO-CFO personality similarity on audit fees is stronger when corporate governance allows greater managerial autonomy, i.e., CEO-CFO compatibility is more important for reducing audit risk when corporate governance is weak. Our results are robust after controlling for many other characteristics of the CEO and CFO, and potential endogeneity related to CEO turnover.

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