CEO turnover and audit pricing: the role of media tone

Abstract

Purpose Prior research documents that chief executive officer (CEO) characteristics and succession planning affect audit fees. However, whether new CEOs’ media coverage influences audit fees remains unexplored. This study aims to fill this gap by examining whether auditors price media coverage of the new CEO. Design/methodology/approach The sample comprises 89 US listed firms with CEO turnover over the period 2012–2016, resulting in a total of 445 firm-year observations. Panel data models are used in the analyses. Findings The results show that audit fees are higher for firms that hire a new CEO covered with more negative media tone. This study further documents that CEO media tone is determined independently of audit pricing, but that the extent of audit fees is positively related to a new CEO covered with more negative media tone, consistent with a sequential media-tone-then-audit-pricing process. Research limitations/implications The results of this study should motivate future auditing research to consider the media as an important source of external information. The findings are also relevant to stakeholders who are interested in understanding the relationship between auditors and their clients’ CEOs. Originality/value This study contributes to the audit fee literature by providing new evidence that auditors view their clients’ CEO with a negative media tone as requiring greater audit effort and leading to higher risks, due to greater public and regulators’ attention conveyed in news coverage. Moreover, the finding of this study that audit fees are higher for firms that hire a new CEO covered with more negative media tone is novel, and extends Joe’s (2003) empirical finding that negative press coverage increases auditors’ perception of risk.