Extreme CEO pay cuts and audit fees

David B. Bryan and Terry W. Mason

Advances in accounting, 2016, vol. 33, issue C, 1-10

Abstract: This study investigates whether sudden and severe reductions in total CEO compensation affect auditor perceptions of risk. We argue that extreme CEO pay cuts can incentivize the CEO to manipulate the financial reports or make risky operational decisions in a desperate attempt to improve firm performance. This incentive, in turn, is likely to impact auditor assessments of audit risk and auditor business risk, leading to higher audit fees. Consistent with our hypothesis, we find evidence of a positive and highly significant association between extreme CEO pay cuts and audit fees. The results suggest that audit fees are 4.6% higher when there is an extreme CEO pay cut, which corresponds to an audit fee that is $111,458 higher for the average firm-year observation in our sample.

Keywords: Extreme CEO pay cuts; Audit fees; Audit risk (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:33:y:2016:i:c:p:1-10

DOI: 10.1016/j.adiac.2016.02.001

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