Do Chief Audit Executives Matter? Evidence from Turnover Events

• In Event: Internal Audit and Technology

Abstract

We investigate the importance of the Chief Audit Executive’s (CAE) internal audit supervisory role by examining the change in internal audit quality following the turnover of CAEs. Using a sample of firms listed on the small and medium enterprise board of China’s stock market, we find that CAE turnover is accompanied by a reduction in internal audit quality and that the reduction is more pronounced for firms whose successor CAEs have lower financial expertise than their predecessors. Further analysis shows that the negative association with internal audit quality is stronger when the turnover is for personal reasons than when it is for internal transfer of the CAE. Our findings are robust to a battery of sensitivity tests, including controlling for confounding turnover of other executives, assessing market reactions, using different turnover windows, and using alternative measures of internal audit quality. Our results highlight the importance of the CAE for a firm’s internal audit quality.

Authors

• Gerald Lobo, University of Houston

• Meng Lyu, Fudan University

• Bing Wang, Nanjing University

• Joseph Zhang, University of Memphis