Who has the Power? Examining the Power Dynamic between CFOs and Audit Partners in Goodwill Impairment Decisions

This paper examines the power dynamic between chief financial officers (CFOs) and audit partners during negotiations involving a complex accounting estimate. Specifically, we identify engagements with large disparities in age between the CFO and audit partner to capture the relative power of the CFO. We focus on the goodwill impairment decision because it is an estimate that relies on significant assumptions and can have negative capital market consequences such that management has an incentive to avoid recording the loss. Consistent with more experience leading to greater bargaining power during the audit, we find that CFOs who are significantly older than their paired audit partners are less likely to record goodwill impairments. These results are robust to alternative design choices such as including company fixed effects, examining impairment magnitude, controlling for relative CEO power, and using a restricted sample that holds audit partners constant across clients. In cross-sectional analysis, we find that the negative association between relatively older CFOs and impairment likelihood is concentrated in settings where market signals are less clear. This uncertainty allows the CFO to exercise his/her power over the impairment decision because the partner has less observable evidence to use in the negotiation. Collectively, our evidence suggests that the CFO and audit partner should not be viewed as isolated actors; instead, their interaction provides insight into circumstances that may be contributing to regulator concerns over the auditing of complex estimates