CEO Turnover and Audit Pricing

Top management turnover can be classified into forced turnover and voluntary turnover. Forced CEO turnover may be triggered by poorer operating performance (Helwege et al. 2012) that fails to meet the expectation of corporate board; this pressure of immediate performance improvement may induce the incoming CEO to engage in earnings management (SAS No.99, AICPA 2002), and in turn increase the likelihood of financial misstatement and audit risk. The incumbent auditor is likely to impose higher audit fees to compensate the additional business risk and financial reporting risk accompanying with the forced CEO turnover (Mock and Wright 1999). In contrast, voluntary CEO turnover is expected by the corporate board, and the incoming CEO should be planned accordingly. Thus, it is less likely for the auditor to receive excess audit fees.