CEO-CFO Compatibility and Audit Risk

51 Pages Posted: 1 Nov 2019 Last revised: 6 Sep 2022

See all articles by Robert M. Bowen

Robert M. Bowen

Chapman University - The George L. Argyros School of Business & Economics; University of Washington - Foster School of Business

S. Jane (Kennedy) Jollineau

Chapman University - The George L. Argyros School of Business & Economics; University of Washington - Foster School of Business

Sarah C Lyon

University of San Diego

Shavin Malhotra

University of Waterloo

Pengcheng Zhu

University of San Diego - School of Business Administration

Date Written: August 30, 2024

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

Suggested Citation

Bowen, Robert M. and Kennedy Jollineau, S. Jane and Lyon, Sarah C and Malhotra, Shavin and Zhu, Pengcheng, CEO-CFO Compatibility and Audit Risk (August 30, 2024). Available at SSRN: https://ssrn.com/abstract=3473963 or http://dx.doi.org/10.2139/ssrn.3473963

Robert M. Bowen

Chapman University - The George L. Argyros School of Business & Economics ( email )

1 University Drive
Orange, CA 92866
United States
206.334.0911 (Phone)

HOME PAGE: http://www.chapman.edu/our-faculty/robert-bowen

University of Washington - Foster School of Business ( email )

Box 353226
University of Washington
Seattle, WA 98195-3226
United States
206.334.0911 (Phone)

HOME PAGE: http://foster.uw.edu/faculty-research/directory/robert-bowen/

S. Jane Kennedy Jollineau (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

1 University Drive
Orange, CA 92866
United States
206.227.7868 (Phone)

HOME PAGE: http://www.chapman.edu/our-faculty/jane-jollineau

University of Washington - Foster School of Business ( email )

Seattle, WA 98195-3226
United States
206.227.7868 (Phone)

Sarah C Lyon

University of San Diego ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States
6192604849 (Phone)
92110 (Fax)

HOME PAGE: http://www.sandiego.edu/

Shavin Malhotra

University of Waterloo ( email )

200 University Ave W
University of Waterloo
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 (Phone)

Pengcheng Zhu

University of San Diego - School of Business Administration ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

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