CFO Power and Audit Quality

Ayoob Alyafai, Ariful Islam, Harjinder Singh and Nigar Sultana

Australian Accounting Review, 2024, vol. 34, issue 4, 306-325

Abstract: Due to their primary responsibilities over the financial reporting process, chief financial officers (CFOs) accumulate critical knowledge, and therefore power, within organisations. We examine whether such powerful CFOs use their influence to increase or decrease audit quality. Using a wide range of proxies for audit quality and a comprehensive measure of CFO power, we find that powerful CFOs are associated with lower levels of audit quality, suggesting that powerful CFOs pursue an agenda of self‐interest. Our results are robust to alternative specifications of our variables, including endogeneity. As a result of our findings, we contribute not only to the academic literature but also provide useful research outcomes, such as aiding with legislation to strengthen corporate governance structures within firms to monitor such powerful CFOs. As a result of primary responsibilities over the financial reporting process, chief financial officers (CFOs) accumulate critical knowledge, and therefore power, within organisations. We examine whether such powerful CFOs use their influence to increase or decrease audit quality. we find that powerful CFOs are associated with lower levels of audit quality suggesting that powerful CFOs pursue an agenda of self‐interest.

Date: 2024
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