All the King's Men : The Proportion of Named Executive Officers Hired by the CEO, Firm Risk, and Audit Pricing

We examine the relation between the proportion of a firm’s top management team that is appointed during a CEO’s tenure (i.e., top management team, or TMT, co-option) and audit pricing. Using a sample of U.S. firms during the 2001-2018 period, we find that TMT co-option is positively associated with audit fees. This result suggests that auditors perceive a firm to be riskier when its CEO appoints a greater proportion of its top management team. Next, we find that a higher degree of TMT co-option appears to increase audit pricing through virtually all channels: due to higher inherent risk, higher control risk, higher auditor litigation risk, and higher firm litigation risk. In additional analysis, we document that TMT co-option is negatively related to the quality of audited earnings, although auditors appear to increase audit effort in the face of high inherent, control, and litigation risks accompanied with TMT co-option. We also find that the relation between TMT co-option and audit fees is less pronounced for firms with stronger corporate governance and longer-tenure auditors. Overall, our results support the notion that auditors charge higher audit fees for increased audit effort and litigation risk associated with TMT co-option