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Extreme CEO pay cuts and audit fees

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  • Bryan, David B.
  • Mason, Terry W.

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.

Suggested Citation

  • Bryan, David B. & Mason, Terry W., 2016. "Extreme CEO pay cuts and audit fees," Advances in accounting, Elsevier, vol. 33(C), pages 1-10.
    • Handle: RePEc:eee:advacc:v:33:y:2016:i:c:p:1-10
    DOI: 10.1016/j.adiac.2016.02.001
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    References listed on IDEAS

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    Cited by:

    1. Ya-Fang Wang, 2022. "Audit Fees, Patent Litigation, and Long-Term Performance," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 15(1), pages 7-15, July.
    2. Lopo Martinez, Antonio & Moraes, Arquimedes de Jesus, 2017. "Relação entre a remuneração dos auditores e o gerenciamento de resultados contábeis," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 57(2), April.
    3. Ji, Xu-dong & Lu, Wei & Qu, Wen, 2018. "Internal control risk and audit fees: Evidence from China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(3), pages 266-287.
    4. Dafydd Mali & Hyoung‐joo Lim, 2021. "Do Relatively More Efficient Firms Demand Additional Audit Effort (Hours)?," Australian Accounting Review, CPA Australia, vol. 31(2), pages 108-127, June.

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