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    CEO Turnover and Audit Pricing.
    research summary posted July 21, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment 
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    Title:
    CEO Turnover and Audit Pricing.
    Practical Implications:

    Voluntary turnover of a CEO does no effect the audit fees of a company. Forced CEO turnover causes the business risk of both the client and the auditor to increase. Thus, audit fees increase. The study has practical implications for companies, by estimating the extra audit costs associated with forced CEO turnover.

    Citation:

    Huang, H., Parker, R. J., Yan, Y., & Lin, Y. 2014. CEO Turnover and Audit Pricing. Accounting Horizons 28 (2): 297-312.

    Keywords:
    audit fees, audit risk, CEO turnover
    Purpose of the Study:

    Accounting researchers have expended considerable resources over the last thirty years investigating factors that influence the audit fees charged by accounting firms. Researchers have found that accounting firms consider the risks of an audit in determining the audit price and that higher risk results in higher prices.

    This study examines the relationship between CEO turnover in client companies and the fees charged by their audit firms. According to the proposed theoretical framework, forced turnover is associated with higher risk for the auditing firm and, consequently, higher audit prices. The authors propose that forced CEO turnover (such as dismissals) pose higher business and audit risks for the audit firm than voluntary turnover (such as retirements); further, greater risk leads to higher audit prices. Forced CEO turnover often is a signal that the board of directors believes that corporate leadership and strategy need to change. This change, in turn, results in uncertainties regarding the competency of a new CEO and the effectiveness of a new strategy. The business risk of both the client and the auditor increases.

    Design/Method/ Approach:

    The authors develop two related regression models to examine audit fees. From the Audit Analytics database, the authors obtain a final sample of 13,692 firm-year observations with audit fees from 2004 to 2011. Of these, there were 1,030 cases with a CEO turnover (7.5 percent of total observations), including 166 observations with forced CEO turnover and 864 observations with voluntary turnover. Voluntary retirement is classified as a CEO who is 60 or older.

    Findings:

    Results for both models indicate that firms with forced CEO turnover have significantly higher audit fees than firms with either voluntary turnover or no turnover. Further, the authors find no difference in audit fees between companies with voluntary turnover and companies without turnover.

    Firms with forced CEO turnover have higher audit fees than both firms with voluntary turnover (mean difference of $763,000, p , 0.001) and firms with no turnover (mean difference of $858,000, p , 0.001); these results suggest forced CEO turnover has a meaningful economic difference. The authors find similar results in a model that examines change in audit fees from the prior year. Firms with forced CEO turnover have a larger increase in audit fees than both firms with voluntary turnover ($956,000 difference, p , 0.001) and firms with no turnover ($1,135,000 difference, p , 0.001).

    Category:
    Client Acceptance and Continuance
    Sub-category:
    Audit Fee Decisions, Client Risk Assessment