The Effects of Prosocial CEOs on Auditors’ Risk Assessments: Evidence from Audit Pricing

Synopsis The research problem The study explores whether auditors adjust their audit fees in response to the presence of prosocial CEOs. The research aims to understand how the ethical traits of CEOs influence auditors’ risk perceptions and, consequently, audit pricing. Motivation or theoretical reasoning The study is motivated by the broader discussion of ethical leadership and its impact on corporate governance. Leveraging upper echelon theory, which suggests that the personal characteristics of top executives can profoundly influence organizational outcomes, the research examines how these traits affect auditors’ perceptions and actions. Test hypothesis The study tests the hypothesis that prosocial CEOs are associated with lower audit fees, as auditors perceive them to have lower business and audit risks. Target population The study analyzes a sample of S&P 1500 firms over the period from 2004 to 2016, excluding financial firms due to their unique accounting practices. Adopted methodology The methodology involves statistical and econometric analyses of audit fees against a range of control variables, such as firm size, operational complexity, and CEO traits. Prosocial CEOs are identified based on their consistent personal charitable donations throughout their tenure. Analyses Empirical analyses include regression models to estimate the impact of prosocial CEOs on audit fees, controlling for various firm and executive characteristics. Findings The findings reveal that firms led by prosocial CEOs tend to pay audit fees that are approximately 5% lower on average, equating to significant cost savings. Further analyses suggest that these reduced fees are driven by prosocial CEOs’ abilities to mitigate agency issues and reduce firm-specific business and audit risks. In addition, the negative relationship between prosocial CEOs and audit fees is particularly pronounced in controversial and socially sensitive industries, where environmental, social, and governance (ESG) risks significantly impact earnings uncertainty.