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How do auditors perceive CEO 's risk‐taking incentives?
Author(s) -
Fargher Neil,
Jiang Alicia,
Yu Yangxin
Publication year - 2014
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12044
Subject(s) - business , audit , portfolio , executive compensation , audit risk , accounting , las vegas , incentive , actuarial science , finance , economics , corporate governance , microeconomics , medicine , metropolitan area , pathology
Prior literature documents that executive compensation influences managerial risk preferences through executives’ portfolio sensitivities to changes in stock prices (delta) and stock‐return volatility (vega). Large deltas discourage managerial risk‐taking, while large vegas encourage risk‐taking. Theory suggests that auditors charge higher audit fees when standard audit procedures do not allow auditors to reduce audit risk including the risk arising from higher business risk. We posit and find evidence of a negative (positive) relation between CEO portfolio deltas (vegas) and audit fees. We also find a negative relation between CEO portfolio deltas and the issuance of going‐concern audit opinions ( GCO ).