CEO-CFO tenure consistency and Earnings quality : The moderating role of the audit fee

Subject Areas : Financial engineering

javid yarahmadi ¹ , Masoud Gholamzadeh Ledari ²

1 - PhD Student, Department of Finance and Accounting, Science and Research Branch, Islamic azad university, Tehran, Iran
2 - Assistant Professor, Department of Finance and Accounting, Science and Research Branch, Islamic azad university, Tehran, Iran

Received: 2023-12-19 Accepted : 2024-09-07 Published : 2024-09-22

Keywords: audit fee, CEO-CFO tenure consistency, earnings quality.,

Abstract :

Paying attention to the relationship between the CEO and CFO as two influential members in determining and implementing the company's operation strategy is very important. Therefore, the aim of the this research is to empirically test the role of the auditor's fee moderator in the relationship between the consistency of the tenure of the CEO and the CFO and Earnings quality. For this purpose, information related to 109 companies listed in Tehran Stock Exchange was collected and analyzed between 2016 and 2021. The findings of the research confirm the negative relationship between the consistency of the tenure of the CEO and the financial manager and the earnings quality. Also, the findings of the research show that the audit fee plays a moderating role in the negative relationship between CEO-CFO tenure consistency and the quality of profit. Based on this, it can be claimed that in companies where the tenure of the CEO and the financial manager are the same, the financial manager cooperates and participates with the CEO in earnings management, and as a result, auditors increase the level of handling and audit fees to cover the audit risk.

References:

1) خدادادی، ولی، قلمبر، محمدحسین و علی چراغی¬نیا (1395). "بررسی تأثیرسیاست تقسیم سودبر رابطه¬ي بین کیفیت سودوحق‌الزحمه حسابرسی". دانش¬حسابداري¬مالی، شماره 1، صص 111-133.
2) سپاسي، سحر و مهدي اسدي وصفي (1395). " بیش اعتمادی مدیران و حق‌الزحمه حسابرسی با تأکید بر نقش کمیته حسابرسی". دانش حسابداری و حسابرسی مدیریت، شماره 19، صص 129-138.
3) لاری دشت بیاض، محمود و جواد اورادی (1396). " بررسي رابطه بين دوره تصدي و دانش مالي مديرعامل با حق الزحمة حسابرسي". بررسی‌های حسابداری و حسابرسی، شماره 1، صص 81-102.
4) محمد، حسنی و بیستون یونس حمه (1401). " تحلیل روابط حق‌الزحمه‌ی حسابرسی و ریسک حسابرسی در مواجهه با تجدید ارائه و آشفتگی مالی". پژوهش‌های حرفه‌ای حسابرسی، شماره 6، صص 82-111.
5) نوشادی، میثم، خدادادی، ولی، واعظ، سیدعلی و علي حسین زاده (1399). " بررسی عوامل مؤثر بر حق‌الزحمه حسابرسی: عوامل مربوط به محیط حرفه‌ای، فرهنگی و اجتماعی". تحقيقات حسابداری و حسابرسی، شماره 46، صص 43-64.
6) نیک¬بخت، محمدرضا و محسن تنانی (1389). "آزمون¬عوامل¬موثربرحق¬الزحمه¬حسابرسی¬صورت¬های مالی ". پژوهش‌های حسابداری مالی، شماره 4، صص 111-132.
7) مشایخ، شهناز و مریم اسماعیلی (1385). بررسی رابطه بین کیفیت سود و برخی از جنبه‌های اصول راهبری در شرکت‌های پذیرفته‌شده در بورس تهران. بررسی‏‌های حسابداری و حسابرسی، شماره 3، صص 25-44.
8) اخلاقی، اسماعیل و نعیمه، پاینده (1400). بررسی¬تاثیرحق¬الزحمه و کیفیت¬حسابرسی¬برکیفیت سود با توجه به بحران مالی، پژوهش‌های معاصر در علوم مدیریت و حسابداری، شماره 3، صص 276-289.
9) مرادی، مجید، صفر پور، مریم و نیک طره منفرد، سوگل. (1398). ارتباط کیفیت سود و حق‌الزحمه حسابرسی با سیاست تقسیم سود شرکت‌های پذیرفته‌شده در بورس اوراق بهادار تهران. چشم‌انداز حسابداری و مدیریت، شماره 2، صص 1-16.
10) Abbott, L.J., Parker, S., Peters, G.F., 2004. Audit committee characteristics and restatements. Audit. J. Pract. Theory 23 (1), 69–87.
11) Abbott, L.J., Parker, S., Peters, G.F., 2006. Earnings management, litigation risk, and asymmetric audit fee responses. Audit. J. Pract. Theory 25 (1), 85–98.
12) Ali, A., Zhang, W., 2015. CEO tenure and earnings management. J. Account. Econ. 59 (1), 60–79.
13) Allen, T.J., Cohen, S., 1969. Information flows in R&D labs. Adm. Sci. Q. 14, 12–19.
14) Ancona, D.G., Caldwell, D.F., 1992. Bridging the boundary: external activity and performance in organizational teams. Adm. Sci. Q. 37 (4), 634–665.
15) Baker, T.A., Lopez, T.J., Reitenga, A.L., Ruch, G.W., 2019. The influence of CEO and CFO power on accruals and real earnings management. Rev.
16) Beck, M.J., Mauldin, E.G., 2014. Who’s really in charge? Audit committee versus CFO power and audit fees. Account. Rev. 89 (6), 2057–2085.
17) Bergstresser, D., Philippon, T., 2006. CEO incentives and earnings management. J. Financ. Econ. 80 (3), 511–529.
18) Bliss, M.A., 2011. Does CEO duality constrain board independence? Some evidence from audit pricing. Account. Finance 51 (2), 361–380.
19) Cai, Y, Li, M. 2022. CEO-CFo tenure consistency and audit fees. J. Pacific-Basin Fanance. 73, 1–14.
20) Carcello, J.V., Hermanson, D.R., Neal, T.L., Riley Jr., R.A., 2002. Board characteristics and audit fees. Contemp. Account. Res. 19 (3), 365–384.
21) Carpenter, M.A., 2002. The implications of strategy and social context for the relationship between top management team heterogeneity and firm performance.
22) Chava, S., Purnanandam, A., 2010. CEOs versus CFOs: incentives and corporate policies. J. Financ. Econ. 97 (2), 263–278.
23) DeFond, M., Zhang, J., 2014. A review of archival auditing research. J. Account. Econ. 58 (2–3), 275–326.
24) Dikolli, S.S., Heater, J.C., Mayew, W.J., Sethuraman, M., 2021. Chief financial officer co-option and chief executive officer compensation. Manag. Sci. 67 (3).
25) Duong, L., Evans, J., 2016. Gender differences in compensation and earnings management: evidence from Australian CFOs. Pac. Basin Financ. J. 40 (12), 17–35.
26) Felix , R., Mansi, S., Pevzner, M., 2024. Audit committee–CFO political dissimilarity and financial reporting quality. Journal of Accounting and Public Policy. 113 (1), 1–22.
27) Geiger, M.A., North, D.S., 2006. Does hiring a new CFO change things? An investigation of changes in discretionary accruals. Account. Rev. 81 (4), 781–809.
28) Graham, J.R., Harvey, C.R., Rajgopal, S., 2005. The economic implications of corporate financial reporting. J. Account. Econ. 40 (1–3), 3–73.
29) Healy, P.M., 1985. The effect of bonus schemes on accounting decisions. J. Account. Econ. 7 (1–3), 85–107.
30) Hsieh, T.S., Kim, J.B., Wang, R.R., Wang, Z., 2020. Seeing is believing? Executives’ facial trustworthiness, auditor tenure, and audit fees. J. Account. Econ.
31) Huang, H.W., Parker, R.J., Yan, Y.C.A., Lin, Y.H., 2014. CEO turnover and audit pricing. Account. Horiz. 28 (2), 297–312.
32) Jackson, S.E., Brett, J.F., Sessa, V.I., Cooper, D.M., Julin, J.A., Peyronnin, K., 1991. Some differences make a difference: individual dissimilarity and group jfineco.2010.03.018.
33) Jiang, J.X., Petroni, K.R., Wang, I.Y., 2010. CFOs and CEOs: who have the most influence on earnings management? J. Financ. Econ. 96 (3), 513–526.
34) Kalelkar, R., Khan, S., 2016. CEO financial background and audit pricing. Account. Horiz. 30 (3), 325–339.
35) Kannan, Y.H., Skantz, T.R., Higgs, J.L., 2014. The impact of CEO and CFO equity incentives on audit scope and perceived risks as revealed through audit fees. Audit. J.
36) Katz, R., 1982. The effects of group longevity on project communication and performance. Adm. Sci. Q. 27 (1), 81–104.
37) Kim, H., Kwak, B., Lim, Y., Yu, J., 2017. Audit committee accounting expertise, CEO power, and audit pricing. Asia-Pac. J. Account. Econ. 24 (3–4), 421–439.
38) Mian, S., 2001. On the choice and replacement of chief financial officers. J. Financ. Econ. 60 (1), 143–175. https://doi.org/10.1016/S0304-405X(01)00042-3.
39) Mitra, S., Song, H., Lee, S.M., Kwon, S.H., 2020. CEO tenure and audit pricing. Rev. Quant. Finan. Acc. 55 (2), 427–459.
40) Smith, K.G., Smith, K.A., Olian, J.D., Sims Jr., H.P., O’Bannon, D.P., Scully, J.A., 1994. Top management team demography and process: the role of social integration Strateg. Manag. J. 23 (3), 275–284.
41) Tsui, J.S., Jaggi, B., Gul, F.A., 2001. CEO domination, growth opportunities, and their impact on audit fees. J. Acc. Audit. Financ. 16 (3), 189–208.
42) Wagner, W.G., Pfeffer, J., O’Reilly III, C.A., 1984. Organizational demography and turnover in top-management group. Adm. Sci. Q. 29 (1), 74–92.
43) Watts, R.L., Zimmerman, J.L., 1978. Towards a positive theory of the determination of accounting standards. Account. Rev. 53 (1), 112–134.
44) Xiang, R., Song, C., 2021. CFO narcissism and audit fees: evidence from listed companies in China. China J. Account. Res. 14 (3), 257–274.
45) Zenger, T.R., Lawrence, B.S., 1989. Organizational demography: the differential effects of age and tenure distributions on technical communication. Acad. Manag. J. 32 (2), 353–376.