Abstract
The role of Chief Executive Officers [CEOs] and Chief Financial Officers [CFOs] in the financial reporting process has come under heightened scrutiny in recent years, such that SOX requires individual executives to certify the accuracy of their financial reports and the quality of their internal controls. Prior research has shown that the appointment of new executives is associated with higher levels of earnings management. We examine the association between firms hiring new CEOs or CFOs and audit fees, to determine if there is an audit fee premium associated with new CEOs (CFOs). Our results indicate that the presence of a new CEO (CFO) is associated with an audit fee premium of 10.5 (9.4) percent. This suggests that auditors are cognizant of, and price, the potential impact of new executives on financial reporting. We are not able, however, to identify the specific bases of the higher fees – greater audit effort or an increased risk premium.
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