Abstract
Individual executives influence many aspects of corporate performance and financial reporting. In this study, we examine whether auditors observe and respond to characteristics of individual executives by adjusting the price of audit services. Using the group connection method for separating firm and executive effects, we find that unexplained audit fees exhibit a statistically and economically significant association with executive fixed effects after controlling for other factors related to the firm and environment. Our tests show only limited evidence that common, observable proxies are associated with the auditor’s perception of an individual executive’s style. Finally, we observe positive and significant associations between the executive fixed effect coefficients and measures of financial reporting risks and audit report delay, indicating auditors’ decisions to adjust fees for executive traits are related to factors representing audit risk and auditor effort. Our findings highlight the importance of differences across individual executives in the external auditor’s decision-making process.
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