سابقه و هدف مدیر بخش مالی شرکت و هزینه حسابرسی CEO Financial Background and Audit Pricing

INTRODUCTION Accounting scholars theorize that audit price is a function of a client’s audit and business risk (e.g., Hay, Knechel, and Wong 2006; Simon and Francis 1988; Simunic 1980). Empirically, there is evidence that auditors consider the CEO’s characteristics when determining the client’s business and audit risk. For instance, Johnson, Kuhn, Apostolou, and Hassell (2012) show that auditors charge higher fees when a client’s CEO exhibits narcissistic behavior, and Kim, H. Li, and S. Li (2015) and Wysocki (2010) find CEOs’ incentive-based compensation to be positively related to audit fees. We extend the literature in this area by studying a relatively neglected aspect of CEO characteristics—the work experience of CEOs in accounting and finance-related jobs—and its impact on auditors’ engagement risk and, therefore, audit pricing. The upper echelons theory suggests that executives’ background and experiences shape the choices they make (Hambrick and Mason 1984; Hitt and Ireland 1985). Prior research shows that CEOs’ functional backgrounds make them more effective at addressing problems in related functional areas. For example, Koyuncu, Firfiray, Claes, and Hamori (2010) document that CEOs with a background in operations are better able to handle problems related to the supply chain, while CEOs with marketing backgrounds are better able than their counterparts to manage marketing policies (Boyd, Chandy, and Cunha 2010). A recent article in the Wall Street Journal highlights an upward trend in the appointment of CEOs with a functional background in finance (henceforth referred to as ‘‘financial expert’’) (Johnson 2015).1 The rise in the number of CEOs with a financial background prompts the question of why an increasing number of firms hire CEOs with such a background. One possible explanation is the increased focus on financial reporting and disclosure policies and potentially increased liabilities due to accounting failure in the post-Sarbanes-Oxley of 2002 (SOX) period (Cao and Narayanamoorthy 2014). Another possible explanation is the increased financial constraint inflicted by the recession of 2008–۲۰۰۹, which makes CEOs with financial acumen more desirable candidates as they are likely to possess a better ability to manage the limited financial resources and use them more productively (Custodio and Metzger 2014). The existing literature documents that firms managed by financial expert CEOs benefit in terms of improved financial policies (Custodio and Metzger 2014) and better disclosure practices (Matsunaga, Wang, and Yeung 2013). We investigate another potential channel (i.e., audit fees) through which a financial expert CEO can create value to the firm.2 We hypothesize that firms with financial expert CEOs pay lower audit fees, because the financial expertise of CEOs (1) improves the quality of earnings (Matsunaga et al. 2013), thus reducing the risk of material misstatement, and (2) increases profitability and reduces firm failure (Custodio and Metzger 2014), reducing a client’s business risk. In other words, auditors’ engagement risk appears to decline with the financial expertise of the CEO, raising the prospect that audit fees will be relatively lower for firms where CEOs are financial experts. We use a sample of data consisting of 77 firms and 81 changes in financial expertise for the period ranging from 2004 to 2013. We hand-collect relevant CEO background information and examine the link between CEOs’ financial expertise and audit fees. Following Custodio and Metzger (2014), we define CEO as a financial expert if he or she worked in banking or investment firms, was an employee of an auditing firm, or worked as a CFO, treasurer, or vice president (VP) of finance. One of the concerns with research related to executive characteristics is the endogenous nature of CEO-firm matching (or the prospect that CEO expertise and firms’ financial and disclosure practices are jointly determined). To the extent that some unobserved quality simultaneously affects both firms’ accounting outcome and financial expert CEOs’ selections, our observed results may be biased. To address such a concern, we follow an approach similar to the managerial-fixed effect model used in Bertrand and Schoar (2003). Specifically, we restrict our analysis only to those firms that either changed CEOs from a nonfinancial expert to financial expert or otherwise. Furthermore, we require firms to have at least a three-year range of data before and after the change within a panel to be included in the sample. We also consider a firm-fixed effect model to control for unobservable persistent firm effects. Our results show that firms with a financial expert CEO pay lower audit fees. In terms of economic magnitude, we find that annual audit fees are lower by approximately 8.5 percent, or approximately $310,000 for firms that have a financial expert CEO. We also use an instrumental variables approach to further validate our results. Using local density of financial firms as an instrument, we continue to find that firms with financial expert CEOs pay lower audit fees. Additionally, in unreported regressions, we control for managerial ability and audit committee diligence; the results based on these specifications (not tabulated) remain similar. This study makes an important contribution to the literature that focuses on CEOs’ personal traits and firm performance. Our study adds to the literature on the role of CEOs’ financial expertise in corporate governance. In particular, we argue that, given the fact that CEOs are the ultimate authority over policy decisions, they play a more influential role in the reporting process when they are financial experts. Our findings increase our understanding that auditors find CEOs’ functional background in finance to be a relevant factor in audit pricing decisions. Our results, however, should be interpreted with caution. In particular, the sample used in the study is relatively small and comprises relatively large firms. The possible implication is that the findings and inferences are limited to such firms, and may not be generalizable to a broader population. Despite such a limitation, our analysis and the robustness of the results suggest that CEOs’ financial expertise has a statistically and economically significant effect on audit pricing. The remainder of the paper proceeds as follows. The following section provides a literature review and develops the hypothesis. The third section illustrates our sample selection process, and the fourth describes the research design. The fifth section then reports the results. The sixth section reports the additional tests, and the seventh concludes the paper.