IDEAS home Printed from https://ideas.repec.org/a/bla/ausact/v34y2024i4p306-325.html

CFO Power and Audit Quality

Author

Listed:
  • Ayoob Alyafai
  • Ariful Islam
  • Harjinder Singh
  • Nigar Sultana

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.

Suggested Citation

  • Ayoob Alyafai & Ariful Islam & Harjinder Singh & Nigar Sultana, 2024. "CFO Power and Audit Quality," Australian Accounting Review, CPA Australia, vol. 34(4), pages 306-325, December.
    • Handle: RePEc:bla:ausact:v:34:y:2024:i:4:p:306-325
    DOI: 10.1111/auar.12436
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/auar.12436
    Download Restriction: no
    File URL: https://libkey.io/10.1111/auar.12436?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Timothy B. Bell & Wayne R. Landsman & Douglas A. Shackelford, 2001. "Auditors' Perceived Business Risk and Audit Fees: Analysis and Evidence," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 39(1), pages 35-43, June.
    2. Francis, Jennifer & LaFond, Ryan & Olsson, Per & Schipper, Katherine, 2005. "The market pricing of accruals quality," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 295-327, June.
    3. Florackis, Chris & Sainani, Sushil, 2018. "How do chief financial officers influence corporate cash policies?," Journal of Corporate Finance, Elsevier, vol. 52(C), pages 168-191.
    4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    5. Ling Lei Lisic & Terry L. Neal & Ivy Xiying Zhang & Yan Zhang, 2016. "CEO Power, Internal Control Quality, and Audit Committee Effectiveness in Substance Versus in Form," Contemporary Accounting Research, John Wiley & Sons, vol. 33(3), pages 1199-1237, September.
    6. Jerry Sun & Guoping Liu, 2011. "Client‐specific litigation risk and audit quality differentiation," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 26(4), pages 300-316, April.
    7. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    8. Aobdia, Daniel, 2019. "Do practitioner assessments agree with academic proxies for audit quality? Evidence from PCAOB and internal inspections," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 144-174.
    9. Feng, Mei & Ge, Weili & Luo, Shuqing & Shevlin, Terry, 2011. "Why do CFOs become involved in material accounting manipulations?," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 21-36.
    10. Joseph H. Zhang, 2018. "Accounting Comparability, Audit Effort, and Audit Outcomes," Contemporary Accounting Research, John Wiley & Sons, vol. 35(1), pages 245-276, March.
    11. (Xuefeng) Jiang, John & Petroni, Kathy R. & Yanyan Wang, Isabel, 2010. "CFOs and CEOs: Who have the most influence on earnings management?," Journal of Financial Economics, Elsevier, vol. 96(3), pages 513-526, June.
    12. Simunic, Da, 1980. "The Pricing Of Audit Services - Theory And Evidence," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 18(1), pages 161-190.
    13. Caglio, Ariela & Dossi, Andrea & Van der Stede, Wim A., 2018. "CFO role and CFO compensation: an empirical analysis of their implications," LSE Research Online Documents on Economics 88296, London School of Economics and Political Science, LSE Library.
    14. Krista Fiolleau & Kris Hoang & Karim Jamal & Shyam Sunder, 2013. "How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice?," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 864-890, September.
    15. Keith L. Jones & Gopal V. Krishnan & Kevin D. Melendrez, 2008. "Do Models of Discretionary Accruals Detect Actual Cases of Fraudulent and Restated Earnings? An Empirical Analysis," Contemporary Accounting Research, John Wiley & Sons, vol. 25(2), pages 499-531, June.
    16. Roslinda Lim, 2011. "Are corporate governance attributes associated with accounting conservatism?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(4), pages 1007-1030, December.
    17. Custódio, Cláudia & Ferreira, Miguel A. & Matos, Pedro, 2013. "Generalists versus specialists: Lifetime work experience and chief executive officer pay," Journal of Financial Economics, Elsevier, vol. 108(2), pages 471-492.
    18. Ghafran, Chaudhry & O'Sullivan, Noel, 2017. "The impact of audit committee expertise on audit quality: Evidence from UK audit fees," The British Accounting Review, Elsevier, vol. 49(6), pages 578-593.
    19. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
    20. Scott Whisenant & Srinivasan Sankaraguruswamy & K. Raghunandan, 2003. "Evidence on the Joint Determination of Audit and Non‐Audit Fees," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 41(4), pages 721-744, September.
    21. Muniandy, Puspa & Tanewski, George & Johl, Shireenjit K., 2016. "Institutional investors in Australia: Do they play a homogenous monitoring role?," Pacific-Basin Finance Journal, Elsevier, vol. 40(PB), pages 266-288.
    22. Hoitash, Rani & Hoitash, Udi & Kurt, Ahmet C., 2016. "Do accountants make better chief financial officers?," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 414-432.
    23. Gull, Ammar Ali & Nekhili, Mehdi & Nagati, Haithem & Chtioui, Tawhid, 2018. "Beyond gender diversity: How specific attributes of female directors affect earnings management," The British Accounting Review, Elsevier, vol. 50(3), pages 255-274.
    24. Anna M. Rose & Jacob M. Rose & Ikseon Suh & Jay Thibodeau & Kristina Linke & Carolyn Strand Norman, 2021. "Why Financial Executives Do Bad Things: The Effects of the Slippery Slope and Tone at the Top on Misreporting Behavior," Journal of Business Ethics, Springer, vol. 174(2), pages 291-309, November.
    25. Gregory Saxton, 2015. "Discussant Comment on “Is Tone at the Top Associated with Financial Reporting Aggressiveness?” by Lorenzo Patelli, Matteo Pedrini," Journal of Business Ethics, Springer, vol. 126(1), pages 21-24, January.
    26. Shivaram Rajgopal & Terry Shevlin & Valentina Zamora, 2006. "CEOs' Outside Employment Opportunities and the Lack of Relative Performance Evaluation in Compensation Contracts," Journal of Finance, American Finance Association, vol. 61(4), pages 1813-1844, August.
    27. Veprauskaitė, Elena & Adams, Mike, 2013. "Do powerful chief executives influence the financial performance of UK firms?," The British Accounting Review, Elsevier, vol. 45(3), pages 229-241.
    28. Jerry Sun & Guoping Liu, 2011. "Client-specific litigation risk and audit quality differentiation," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(4), pages 300-316, April.
    29. Lorenzo Patelli & Matteo Pedrini, 2015. "Is Tone at the Top Associated with Financial Reporting Aggressiveness?," Journal of Business Ethics, Springer, vol. 126(1), pages 3-19, January.
    30. Paul Hribar & D. Craig Nichols, 2007. "The Use of Unsigned Earnings Quality Measures in Tests of Earnings Management," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 45(5), pages 1017-1053, December.
    31. Marianne Bertrand & Antoinette Schoar, 2003. "Managing with Style: The Effect of Managers on Firm Policies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1169-1208.
    32. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    33. Leventis, Stergios & Weetman, Pauline & Caramanis, Constantinos, 2011. "Agency costs and product market competition: The case of audit pricing in Greece," The British Accounting Review, Elsevier, vol. 43(2), pages 112-119.
    34. Dan S. Dhaliwal & Phillip T. Lamoreaux & Clive S. Lennox & Landon M. Mauler, 2015. "Management Influence on Auditor Selection and Subsequent Impairments of Auditor Independence during the post†SOX Period," Contemporary Accounting Research, John Wiley & Sons, vol. 32(2), pages 575-607, June.
    35. Antle, R & Nalebuff, B, 1991. "Conservatism And Auditor-Client Negotiations," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 29, pages 31-54.
    36. Ball, Ray & Jayaraman, Sudarshan & Shivakumar, Lakshmanan, 2012. "Audited financial reporting and voluntary disclosure as complements: A test of the Confirmation Hypothesis," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 136-166.
    37. Karl Hackenbrack & W. Robert Knechel, 1997. "Resource Allocation Decisions in Audit Engagements," Contemporary Accounting Research, John Wiley & Sons, vol. 14(3), pages 481-499, September.
    38. Knechel, W. Robert, 2007. "The business risk audit: Origins, obstacles and opportunities," Accounting, Organizations and Society, Elsevier, vol. 32(4-5), pages 383-408.
    39. repec:hal:journl:hal-02312045 is not listed on IDEAS
    40. Cohen, Daniel A. & Zarowin, Paul, 2010. "Accrual-based and real earnings management activities around seasoned equity offerings," Journal of Accounting and Economics, Elsevier, vol. 50(1), pages 2-19, May.
    41. repec:eme:maj000:02686901111124639 is not listed on IDEAS
    42. Wintoki, M. Babajide & Linck, James S. & Netter, Jeffry M., 2012. "Endogeneity and the dynamics of internal corporate governance," Journal of Financial Economics, Elsevier, vol. 105(3), pages 581-606.
    43. Weili GE & Dawn Matsumoto & Jenny Li Zhang, 2011. "Do CFOs Have Style? An Empirical Investigation of the Effect of Individual CFOs on Accounting Practices," Contemporary Accounting Research, John Wiley & Sons, vol. 28(4), pages 1141-1179, December.
    44. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LLC, vol. 9(1), pages 86-136, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wang, Chenxi & Han, Wenqi & Wang, Deli & Deng, Xincai, 2025. "Impact of client information technology applications on audit fees," International Review of Financial Analysis, Elsevier, vol. 107(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Singh, Harjinder & Sultana, Nigar & Islam, Ariful & Singh, Abhijeet, 2022. "Busy auditors, financial reporting timeliness and quality," The British Accounting Review, Elsevier, vol. 54(3).
    2. Florackis, Chris & Sainani, Sushil, 2021. "Can CFOs resist undue pressure from CEOs to manage earnings?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    3. Jinghui Sun & Pamela Kent & Baolei Qi & Jiwei Wang, 2019. "Chief financial officer demographic characteristics and fraudulent financial reporting in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(4), pages 2705-2734, December.
    4. Dina El Mahdy & Fatima Alali, 2023. "Female CFOs and managerial opportunism," Review of Quantitative Finance and Accounting, Springer, vol. 60(3), pages 1161-1207, April.
    5. Lyu, Meng & Christine Sun, Xiaojie & Wang, Bing, 2022. "Does CFO vertical duality affect financial outcomes? Evidence from the CFO acting as the head of accounting," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 49(C).
    6. Hoitash, Udi & Mkrtchyan, Anahit, 2022. "Internal governance and outside directors’ connections to non-director executives," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    7. Hu, Juncheng, 2021. "Do facilitation payments affect earnings management? Evidence from China," Journal of Corporate Finance, Elsevier, vol. 68(C).
    8. Pascale Lapointe-Antunes & Kevin Veenstra & Kareen Brown & Heather Li, 2022. "Welcome to the Gray Zone: Shades of Honesty and Earnings Management," Journal of Business Ethics, Springer, vol. 177(1), pages 125-149, April.
    9. Tutun Mukherjee & Som Sankar Sen, 2022. "Impact of CEO attributes on corporate reputation, financial performance, and corporate sustainable growth: evidence from India," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-50, December.
    10. Dobija, Dorota & Hryckiewicz, Aneta & Zaman, Mahbub & Puławska, Karolina, 2022. "Critical mass and voice: Board gender diversity and financial reporting quality," European Management Journal, Elsevier, vol. 40(1), pages 29-44.
    11. Sang Cheol Lee & Jaewan Park & Mooweon Rhee & Yunkeun Lee, 2018. "Moderating Effects of Agency Problems and Monitoring Systems on the Relationship between Executive Stock Option and Audit Fees: Evidence from Korea," Sustainability, MDPI, vol. 10(11), pages 1-24, November.
    12. Justin J. Hopkins & Edward L. Maydew & Mohan Venkatachalam, 2015. "Corporate General Counsel and Financial Reporting Quality," Management Science, INFORMS, vol. 61(1), pages 129-145, January.
    13. Eman F. Attia & Sameh Yassen & Ahmed Chafai & Ahmed Qotb, 2024. "The impact of board gender diversity on the accrual/real earnings management practice: evidence from an emerging market," Future Business Journal, Springer, vol. 10(1), pages 1-18, December.
    14. Bona-Sánchez, Carolina & Fleitas-Castillo, Gema C. & Pérez-Alemán, Jerónimo & Santana-Martín, Domingo J., 2024. "Gender diversity and audit fees: Insights from a principal-principal agency conflict setting," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    15. Islam, Md Ariful & Hossain, Shahadat & Singh, Harjinder & Sultana, Nigar, 2021. "Outsider CEOs and corporate debt," International Review of Financial Analysis, Elsevier, vol. 74(C).
    16. H M Arif & Mohd Zulkhairi Mustapha & Azlina Abdul Jalil, 2023. "Do powerful CEOs matter for earnings quality? Evidence from Bangladesh," PLOS ONE, Public Library of Science, vol. 18(1), pages 1-28, January.
    17. Plöckinger, Martin & Aschauer, Ewald & Hiebl, Martin R.W. & Rohatschek, Roman, 2016. "The influence of individual executives on corporate financial reporting: A review and outlook from the perspective of upper echelons theory," Journal of Accounting Literature, Elsevier, vol. 37(C), pages 55-75.
    18. Fang, Ming & Francis, Bill & Hasan, Iftekhar & Wu, Qiang, 2022. "External social networks and earnings management," The British Accounting Review, Elsevier, vol. 54(2).
    19. Tri Tri Nguyen & Chau Minh Duong & Sunitha Narendran, 2021. "CEO profile and earnings quality," Review of Quantitative Finance and Accounting, Springer, vol. 56(3), pages 987-1025, April.
    20. Mehdi Nekhili & Fahim Javed & Haithem Nagati, 2022. "Audit Partner Gender, Leadership and Ethics: The Case of Earnings Management," Journal of Business Ethics, Springer, vol. 177(2), pages 233-260, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ausact:v:34:y:2024:i:4:p:306-325. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1035-6908 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.