Do CEO Succession and Succession Planning Affect Audit Risk? Implications of Promoting from Within

• In Event: Audit Risk

Abstract

In this paper, we examine how CEO succession and succession planning affect auditors’ risk assessments. Management succession introduces uncertainty about firms’ future operations, financial policies, and potential motivation for earnings management, which we predict elevates auditors’ assessments of the risk of financial reporting improprieties. Consistent with this prediction, which is derived from agency theory, we find that auditors charge higher audit fees for clients with new CEOs. Importantly, however, we note that careful CEO succession planning (i.e., promoting an “heir apparent”) attenuates auditors’ assessment of risk as evidenced by a lack of an audit pricing adjustment. Additionally, we do not find evidence of a deterioration in audit quality with new CEOs, independent of the succession plan. Thus, despite greater management uncertainty surrounding certain types of CEO succession, auditors increase effort accordingly such that audit quality does not suffer.

Authors

• Kenneth L Bills, University of Arkansas

• Ling Lisic, George Mason University

• Timothy Andrew Seidel, Utah State University