“Audit Fees and CEO Network Centrality”
by Mohamad Mazboudi
American University of Beirut
We introduce the well-established concept of social network centrality to the auditing literature. We argue that CEO network centrality increases the CEO bargaining power in audit fee negotiations since high network centrality brings influence and power to CEOs within their social networks. We find that audit fees are lower in firms managed by CEOs with high network centrality. This is slightly more pronounced when a firm constitutes a greater share of an auditor’s industry clientele. Interestingly, we also find that audit quality does not deteriorate when audit fees are lower if the firms have more central CEOs. We further document the influence high-centrality CEOS have on the audit decisions of their social peers. For example, we show that less central (i.e., peripheral) CEOs are likely to hire auditors that do work for firms with CEOs enjoying high levels of network centrality. Together these results suggest that high network centrality reflects a bargaining power CEOs can use to lower their audit fees.
Keywords: Audit fees; Bargaining power; Social networks; Network centrality.
JEL Classification: L 14; M 41; M 42