CEO–CFO Compatibility and Audit Risk

This study examines the influence of CEO–CFO compatibility (proxied by the similarity of their personalities) on audit risk (proxied by audit fees). Relying on similarity-attraction theory, we posit that alignment between the CEO's and CFO's personalities − specifically their ‘Big Five’ traits − enhances internal communication, information sharing and decision-making processes within the organization. This alignment, in turn, reduces audit risk associated with the firm's financial reporting. We test our theory using firm fixed effects and find that greater CEO–CFO personality similarity is associated with reduced audit fees. Further, we find that the tenure of the CEO–CFO relationship partially explains the relation between their personality similarity and audit fees. Finally, we find that the effect of CEO–CFO personality similarity on audit fees is stronger when corporate governance allows greater managerial autonomy, that is, CEO–CFO compatibility is more important for reducing audit risk when corporate governance is weak. Our results are robust after controlling for many other characteristics of the CEO and CFO and potential endogeneity related to CEO turnover.