Managerial overconfidence and audit fees

Scott Duellman, Helen Hurwitz and Yan Sun

Journal of Contemporary Accounting and Economics, 2015, vol. 11, issue 2, 148-165

Abstract: We investigate the association between managerial overconfidence and audit fees, as well as the effect of a strong audit committee on this relation. Overconfident managers tend to overestimate their ability and the future payouts of projects but underestimate the likelihood and impact of adverse events. If auditors perceive managerial overconfidence as increasing audit risk, they will charge additional fees to compensate for the increased audit effort. Conversely, audit fees for companies with an overconfident manager will be lower if managers demand less audit services due to either hubris in their companies' financial reporting or a desire to reduce auditor scrutiny over aggressive accounting practices. We find evidence of a negative relation between managerial overconfidence and audit fees for companies lacking a strong audit committee. Additionally, we find that overconfident managers are less likely to use an industry specialist auditor.

Keywords: Overconfidence; Audit fees; Specialist auditor; Audit committee (search for similar items in EconPapers)
JEL-codes: G32 M41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocaae:v:11:y:2015:i:2:p:148-165

DOI: 10.1016/j.jcae.2015.05.001

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Journal of Contemporary Accounting and Economics is currently edited by Agnes C.S. Cheng, P. Clarkson, F.A. Gul, Zoltan Matolcsy, Dan Simunic and Ben Srinidhi

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