@article{389cbae751904c5190973bed00ee97b1,
title = "Seeing is believing? Executives' facial trustworthiness, auditor tenure, and audit fees",
abstract = "Psychology and neuroscience studies document that facial trustworthiness perceptions may affect observers' decision-making process. Our study examines whether auditors' perceptions of client executives' facial trustworthiness are associated with their audit fee decisions. We employ a machine-learning-based face-detection algorithm to measure executives' facial trustworthiness. We find that auditors charge 5.6% less audit fee to firms with trustworthy-looking CFOs than to those with untrustworthy-looking CFOs in initial audit engagements. Auditor tenure weakens the negative association between CFOs' facial trustworthiness and audit fee. Further evidence shows that CFO's facial trustworthiness is associated with neither financial reporting quality nor litigation risk.",
keywords = "Audit fee, Auditor tenure, CFO, Cognitive bias, Facial trustworthiness",
author = "Hsieh, {Tien Shih} and Kim, {Jeong Bon} and WANG, {Ray R} and Zhihong Wang",
note = "Funding Information: Our paper has benefitted a lot from insightful comments and constructive suggestions that we received from Joanna Wu (the editor) and the anonymous reviewer throughout multiple rounds of the review process. We thank Tracy Gu, Dan Simunic, and participants of research workshops/Ph.D. seminars at City University of Hong Kong, Fudan University, and Sun Yat-sen University, as well as the 2018 Annual Meeting of American Accounting Association for their valuable comments. We also appreciate Tang Peng of Bank of America Merrill Lynch for providing advanced computer techniques in image processing. Ray R. Wang acknowledges the financial support from Hong Kong Baptist University . Jeong-Bon Kim acknowledges partial financial support from the start-up grant of City University of Hong Kong . All errors are, of course, our own. Funding Information: In column C of Table 6 Panel A, we report the results of the regression including both CEOs' and CFOs' facial trustworthiness and their interactions with auditor tenure. As shown in column C, we find consistent results showing a negative effect of CFOs' facial trustworthiness on audit fee (?0.067, t-stat. = ?3.79) and a positive effect of the interaction between CFOs' facial trustworthiness and auditor tenure (0.002, t-stat. = 2.88). In addition, we find that both the main and interaction effects of CEOs' facial trustworthiness remain insignificant. Overall, the results suggest that audit fee is influenced by auditors' perceptions of CFOs' (but not CEOs') trustworthiness based on facial features.21 This is because auditors gain more client-specific knowledge about audit engagement risks as the auditor-client relationship accumulates. The results for the control variables are highly consistent with those reported in prior studies ( Abbott et al., 2003; Beck and Mauldin, 2014; Choi et al., 2008; Huang et al., 2007) and those in Table 4. In short, the results in Table 6 Panel A support the prediction of H2 regarding the effect of CFO facial trustworthiness.Our paper has benefitted a lot from insightful comments and constructive suggestions that we received from Joanna Wu (the editor) and the anonymous reviewer throughout multiple rounds of the review process. We thank Tracy Gu, Dan Simunic, and participants of research workshops/Ph.D. seminars at City University of Hong Kong, Fudan University, and Sun Yat-sen University, as well as the 2018 Annual Meeting of American Accounting Association for their valuable comments. We also appreciate Tang Peng of Bank of America Merrill Lynch for providing advanced computer techniques in image processing. Ray R. Wang acknowledges the financial support from Hong Kong Baptist University. Jeong-Bon Kim acknowledges partial financial support from the start-up grant of City University of Hong Kong. All errors are, of course, our own.",
year = "2020",
month = feb,
doi = "10.1016/j.jacceco.2019.101260",
language = "English",
volume = "69",
journal = "Journal of Accounting and Economics",
issn = "0165-4101",
publisher = "Elsevier",
number = "1",
}