Who has the Power? Examining the Power Dynamic between CFOs and Audit Partners in Goodwill Impairment Decisions

• In Event: Auditor and Governance Dynamics

Abstract

ABSTRACT: We examine the role of power dynamics in negotiations between the auditor and client management regarding the value of complex accounting estimates. Specifically, we identify engagements where a power differential exists between the CFO and audit partner to investigate whether large differences in relative power affect the likelihood and magnitude of goodwill impairments. Using a large difference in age between the CFO and audit partner to identify engagements where a power differential exists, we find evidence of less frequent and smaller impairments in settings with more powerful CFOs. Our results are robust to alternative design choices such as the inclusion of company fixed effects and using a limited sample that holds audit partners constant across clients. In additional cross-sectional analyses, we find supportive evidence that audit committees with more task-specific experience are able to mitigate the influence of more powerful CFOs on impairment decisions. Collectively, our evidence suggests that the audit partner and CFO should not be viewed as isolated actors; instead, their interaction can provide insight into circumstances that may be driving regulator concerns over the auditing of complex estimates.

Authors

• Matthew A Cobabe, Virginia Tech

• Sarah E Stein, Virginia Tech

• Delia Valentine, Virginia Tech