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Do Auditors Respond to Unique Characteristics of Individual Executives? Evidence from Audit Pricing Decisions

Fri, January 16, 3:30 to 4:45pm, TBA

Abstract

Individual executives influence many aspects of corporate performance and financial reporting. In this study, we examine whether auditors observe and respond to characteristics of individual executives by adjusting the price of audit services. Using the group connection method for separating firm and executive effects, we find unexplained audit fees exhibit a statistically and economically significant association with executive fixed effects after controlling for firm-specific effects. In additional tests, we create a sample of executive movers and continue to find evidence suggesting executive characteristics are an important determinant of unexplained audit fees. Finally, we observe that the executive fixed effect coefficients exhibit positive and significant associations with financial reporting risks and audit report delay, indicating auditors’ decisions to adjust fees for specific executives are related to factors representing audit risk and auditor effort. Our findings highlight the importance of differences across individual executives in the external auditor’s decision-making process.

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