Monitoring Off-the-Clock Behavior

• In Event: Financial Misconduct and Auditor Busyness

Abstract

We examine whether two key external monitors—financial statement auditors and financial analysts—respond to public allegations of personal indiscretions against companies’ CEOs, other executives, and directors. Specifically, we hand collect and examine personal indiscretions of four types: violence, sexual misadventure, substance abuse, and dishonesty. We find that auditors of indiscretion firms charge significantly higher fees and take longer to issue the audit report in the year of the allegation and are also significantly more likely to resign from the client. We also find that analysts’ EPS and consensus forecasts immediately following the first public mention of the allegation are significantly lower and forecast dispersion is higher. Results among both monitors are strongest for allegations related to the CEO, and auditor responses are strongest when the allegation relates to personal dishonesty. Importantly, supplemental tests show that the documented results are not merely due to subsequent declines in actual operating performance or subsequent turnover of the CEO. We interpret our results as suggesting that auditors and analysts view management’s personal indiscretions as representing poor tone at the top, thus increasing risk for the company as a whole.

Authors

• Brant E. Christensen, University of Oklahoma

• Brandon Cline, Mississippi State University

• Nathan Lundstrom, University of Kansas

• Adam Yore, University of Missouri