Do Audit Fees Reflect Unique Characteristics of Individual Executives?

Abstract

SYNOPSISWe examine whether audit fees reflect characteristics of individual executives incremental to known determinants of fees. Using a novel executive effects approach, we find that unexplained audit fees exhibit a statistically and economically significant association with executive effects after controlling for factors related to the firm and environment. Specifically, executive effects represent between 20 and 39 percent of the total variation in unexplained audit fees. Our tests also show only limited evidence that observable proxies are associated with the auditor's perception of an executive's style, which suggests that our analysis identifies unobservable traits that cannot be captured by typical measures in archival research (e.g., gender, age, educational background, and board membership). Collectively, our study highlights the importance of executive characteristics in the determination of audit fees and suggests that future research may benefit from additional consideration of individual executives' influence on the pricing of audit services.Data Availability: Data used in this study are available from public sources identified in the document.