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How do auditors perceive CEO's risk-taking incentives?

Author

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  • Neil Fargher
  • Alicia Jiang
  • Yangxin Yu
  • Gary Monroe

Abstract

type="main" xml:id="acfi12044-abs-0001"> Prior literature documents that executive compensation influences managerial risk preferences through executives’ portfolio sensitivities to changes in stock prices (delta) and stock-return volatility (vega). Large deltas discourage managerial risk-taking, while large vegas encourage risk-taking. Theory suggests that auditors charge higher audit fees when standard audit procedures do not allow auditors to reduce audit risk including the risk arising from higher business risk. We posit and find evidence of a negative (positive) relation between CEO portfolio deltas (vegas) and audit fees. We also find a negative relation between CEO portfolio deltas and the issuance of going-concern audit opinions (GCO).

Suggested Citation

  • Neil Fargher & Alicia Jiang & Yangxin Yu & Gary Monroe, 2014. "How do auditors perceive CEO's risk-taking incentives?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(4), pages 1157-1181, December.
    • Handle: RePEc:bla:acctfi:v:54:y:2014:i:4:p:1157-1181
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    File URL: http://hdl.handle.net/10.1111/acfi.2014.54.issue-4
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    Cited by:

    1. Richard Anthony Kent & Di Bu, 2020. "The importance of cash flow disclosure and cost of capital," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 877-908, April.
    2. Duellman, Scott & Hurwitz, Helen & Sun, Yan, 2015. "Managerial overconfidence and audit fees," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(2), pages 148-165.
    3. Jinghui Sun & Pamela Kent & Baolei Qi & Jiwei Wang, 2019. "Chief financial officer demographic characteristics and fraudulent financial reporting in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(4), pages 2705-2734, December.
    4. Kusharyanti Kusharyanti & Indra Wijaya Kusuma, 2020. "Overconfident Management and the Audit Fee Demand-Side Perspective," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 10(10), pages 1131-1146, October.
    5. Michael Mayberry, 2020. "Good for managers, bad for society? Causal evidence on the association between risk‐taking incentives and corporate social responsibility," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1182-1214, October.
    6. Susana Alvarez-Diez & J. Samuel Baixauli-Soler & Maria Belda-Ruiz, 2016. "Early Exercise Behaviour in Performance-vested Stock Option Grants," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 55-78, May.
    7. Bryan, David B. & Mason, Terry W., 2016. "Extreme CEO pay cuts and audit fees," Advances in accounting, Elsevier, vol. 33(C), pages 1-10.
    8. Bryan, David B. & Mason, Terry W., 2017. "Executive tournament incentives and audit fees," Advances in accounting, Elsevier, vol. 37(C), pages 30-45.
    9. Jacqueline Christensen & Pamela Kent & Tom Smith, 2016. "The decision to outsource risk management services," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(4), pages 985-1015, December.
    10. Song, Yunling & Wu, Hao & Ma, Yan, 2023. "Does ESG performance affect audit pricing? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 90(C).
    11. Jennifer Gippel & Tom Smith & Yushu Zhu, 2015. "Endogeneity in Accounting and Finance Research: Natural Experiments as a State-of-the-Art Solution," Abacus, Accounting Foundation, University of Sydney, vol. 51(2), pages 143-168, June.
    12. Du, Shuili & Xu, Xiaolu & Yu, Kun, 2020. "Does corporate social responsibility affect auditor-client contracting? Evidence from auditor selection and audit fees," Advances in accounting, Elsevier, vol. 51(C).
    13. Sang Cheol Lee & Jaewan Park & Mooweon Rhee & Yunkeun Lee, 2018. "Moderating Effects of Agency Problems and Monitoring Systems on the Relationship between Executive Stock Option and Audit Fees: Evidence from Korea," Sustainability, MDPI, vol. 10(11), pages 1-24, November.

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