Tournament incentives and audit fees

Abstract Prior studies suggest that promotion-based tournament incentives lead to greater managerial risk-taking and a higher propensity for financial misconduct and that auditors charge more for clients whom they perceive to have a higher likelihood of financial misreporting. Using a sample of US firms from 2000 to 2013, we hypothesize and find that tournament incentives are positively associated with audit fees. The association is attenuated for firms with a recent CEO turnover, in industries in which outside succession is more likely, and for family firms. The association is accentuated, however, when firms have large abnormal accruals or are experiencing poor performance and when the CEO nears retirement. This paper’s findings advance our understanding of the links between corporate compensation policies and auditors’ risk assessment and pricing decisions, as well as the economic consequences of promotion-based tournament incentives.