Audit Fees and Auditor Choice: Evidence from CFO Board Membership

• In Event: Auditing II

Abstract

We address the question of audit fees and auditor choice for boards having a Chief Financial Officer (CFO) with board membership. A CFO with board membership potentially reduces the board’s power to independently oversee their actions. On the other hand, they also provide greater financial expertise to the board (e.g., financial reporting and internal controls). We find that CFO board membership is negatively associated with audit fees, suggesting that CFO board membership is associated with less audit risk. We further find that the negative association only exists for highly independent boards and otherwise is not significant for less independent boards. This result suggests that the CFO’s competence complements the more independent board’s demand for stronger financial reporting and corporate governance. These results are robust to using a propensity score matched sample to mitigate selection bias. Regarding auditor choice, we find that firms with CFO boar membership are less likely to choose a Big 4 audit firm, suggesting that the CFO’s competence substitutes the choice of a higher quality auditor. The findings are robust to a sample of new auditor appointments.

Authors

• Kenneth J Reichelt, Louisiana State University

• Nusrat Jahan, Louisiana State University