CEO-CFO Personality Differences and Audit Fees: The Price of Conflict?

Abstract

We examine whether personality differences between the CEO and CFO influence audit fees. Audit fees should reflect engagement risk associated with a client. We use personality differences between the CEO and CFO as a proxy for potential poor communication, reluctance to share information, and other forms of dysfunctional conflict. We find that CEO-CFO personality differences are positively associated with (i) some measures of financial reporting risk, and (ii) audit fees after controlling for other determinants of audit fees from the prior literature. We also find that audit fees increase (decrease) when personality differences increase (decrease) following turnover in the CEO-CFO team. Further, the effect of CEO-CFO personality differences on audit fees is (i) partially mediated by how long the CEO and CFO work together, and (ii) moderated by board independence. Taken together, these results suggest that auditors adjust for potential dysfunctional behavior in the CEO-CFO team in assessing engagement risk and setting audit fees.

Keywords: CEO-CFO conflict; cognitive conflict; affective conflict; personality differences; top management team (TMT) diversity; financial reporting risk; audit fees; engagement risk; board independence; auditor tenure

JEL Classification: D81, D83, M12, M14, M49