THE EFFECTS OF SUCCESSOR CEO’S ORIGIN ON AUDITORS’ CLIENT RISK ASSESSMENT AND CONTINUANCE DECISIONS FOLLOWING A CORPORATE SCANDAL
Chair or Co-Chair
This study examines the effects of chief executive officer (CEO) succession and successor origin on auditors’ client risk assessment, continuance, and audit effort decisions following a major scandal in a client firm. 83 experienced audit professionals drawn from U.S. public accounting firms participated in a 2 x 2 experiment with the CEO succession triggering event (clients’ ethical or operational failure) and successor-CEO origin (insider/outsider) manipulated randomly between subjects. The study examined the effects of these variables on auditors’ judgments when making client risk assessment, continuance, and audit effort decisions. Results indicate that auditors assess higher risk of material misstatements (main dependent variable for risk) for insider than outsider successor-CEO following an ethical scandal. Further analyses reveal that there is no significant difference in auditors’ assessment of risk of material misstatements for insider versus outsider successor-CEO following an operational scandal. These findings support the hypothesized effects of the CEO’s origin on auditors’ assessment for both the ethical and operational scandal factors.
Furthermore, this study predicted that following an ethical scandal, auditors would be less likely to recommend retaining a client when an insider successor-CEO is chosen than when an outsider successor-CEO is chosen. Results provide support for this prediction. In addition, results provide support for the proposed hypothesis that the successor-CEO’s origin (insider or outsider) has no effect on auditors’ client retention decision following an operational failure.
This study also predicted that successor-CEO’s origin would have no effect on auditors’ audit effort regardless of the nature of the scandal. Audit effort was measured using planned audit hours, audit staff experience, and increase in audit fees for the audit engagement following the scandal and CEO succession. The results provide support for this prediction.
This study will provide investors and other stakeholders with insights into the auditors’ decision-making process following incidents of ethical or operational failure in the client firm. Specifically, boards of directors may find the findings useful when selecting a new CEO following a corporate scandal.
Available for download on Wednesday, November 06, 2024