Impact of CEO Age on Audit Fees in Australian Listed Companies

This study examines the correlation between CEO age and audit fees in Australian listed companies. The research explores the impact of CEO age on business operations, stock prices, acquisition behavior, and audit fees. Hypotheses are developed and research methods are outlined.

T e mpact o a e o A tralian li ted companie on t e a dit ee c ar ed t e a ditorh I f CEO g f us s s h u f s h g by h u s
The Impact of CEO age of Australian listed companies
on the audit fees charged by the auditors
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T e mpact o a e o A tralian li ted companie on t e a dit ee c ar ed t e a ditorh I f CEO g f us s s h u f s h g by h u s
1. Introduction and background
This study is designed to highlight the correlation between the age of the CEOs of the
listed companies in Australia and the audit fees that these companies incur. During the
early 2000s several high-profile accounting scandals emerged which pushed the
legislatures and several bodies concerned with regulating accounting activities to pass the
Sarbanes-Oxley act in 2002. This act made it mandatory for the chief executives and the
CFOs to approve their firm’s financial statements before they are filed with the SEC. This
new requirement was meant to monitor unethical behaviours among the executives and
make them professionally responsible for fraudulent accounting behaviours (Huang, et
al., 2012). By doing this, the CEOs were given more supervisory role to the accounting
statements creation and release process.
Following the research by (Sundaram & Yermack, 2007), it was found that people tend to
develop more ethical behaviours and becomes more conservative as they grow old. Old
managers portray less aggressiveness in their management approach. This makes them
more likely to insist on the production of high-quality accounting records.
Further, researches which have been conducted in the recent times are supporting the
theory that the personal traits of a CEO have an impact on their corporate policies, for
example issues such as individual life experience, preference for leverage and
overconfidence are what shapes CEO’s financial actions as well as their attitude towards
risks (Cronqvist, et al., 2012). Even though the age of a CEO can easily be observed, little
information still exists on how their age correlates to the quotation of accounting fees by
the audit firms.
Past theories are under the impression that CEO’s age have an influence on their risk-
taking decisions but these predictions give mixed illustrations. Models such as those
concerned with career development predict that risk aversion behaviours are more
portrayed in younger CEO’s due to their lack of reputation as high-quality executives.
This makes the managers at risk of suffering heavy punishment for unfavourable
performance through reduction of opportunities to advance their careers in future. As a
result, they may end up being induced to incorporate more conservative investment
decisions. Contrary to this, the model developed by (Prendergast & Stole, 1996) suggest
that younger CEO are great risk takers and often get involved in aggressive investment
decisions in their bid to signal superior abilities. This is further, associated with

T e mpact o a e o A tralian li ted companie on t e a dit ee c ar ed t e a ditorh I f CEO g f us s s h u f s h g by h u s
overweighing of personal beliefs and exaggeration of investment attitudes so as to appear
talented making them to be classified as risk takers. These behaviours are supported by
the actions of 30-year-old Michael Reger during his tenure as the chief executive of the
Northern oil and Gas when he directed capital investment towards drilling oil in areas yet
to be explored (Serfling, 2014). This action was heavily criticised and termed as beyond
the risk tolerance of older generation CEOs.
The structure of this proposal will be as indicated below,
Evaluation of the literature review followed by hypothesis to be tested leading to the
discussion on research methods and will be ended with a conclusion.
2. Literature review
i) How CEO age could impact upon business operations.
Age impact on the price of company stocks
In their study on the association between the CEO’s age and the changes in the
business stock prices, (Andreou, et al., 2016) concluded that younger CEO’s are
strongly correlated to future stock prices crash which include crash generated by
breaks in consecutive earning strings. The collected evidence is supported by the
notion that younger CEO occasionally hide unfavourable news associated with poor
performance in the business operations. Considering that strings of consecutive
earnings increase are explained by large permanent CEO compensation increase
which don’t dissipate with crashes, it can be viewed that the younger CEO do have
financial incentives to hide unfavourable news at the initial stages of their career
(Baik, et al., 2011). This gives an indication that the young CEOs do exploit
opportunities arising from weak corporate governance to pursue their individual
interests. The study gave a suggestion that CEO’s age is a factor to be considered in
determination of stock price crash risk and goes on to widen our knowledge on how
the CEO age is an agency problem (Carter & Lorsch, 2004).
The age of the CEO and the acquisition behaviour
From the study by (Yim, 2013), it was demonstrated that there is an association
between acquisition and huge permanent increase on the compensation of the
business CEO. This led to a declining incentive on the CEO’s incentive to pursue

T e mpact o a e o A tralian li ted companie on t e a dit ee c ar ed t e a ditorh I f CEO g f us s s h u f s h g by h u s
acquisitions as they age. For this reason, the age of the CEO does play a vital role
when evaluating a firm’s acquisition actions.
From the conclusions in the research CEO age is modelled to have an economical
effect in the development and implementations of business corporate policies.
This indicates that the board’s selection of a CEO matters a lot which in turn end
up complicating the director’s duties. The board members are tasked with
pursuing the objectives of the shareholders by examining the abilities of the CEO
and providing them enough incentives to allow them adhere to the firm’s goal
congruence.
Young CEOs may be optimally selected based on their role which demand diverse
knowledge and skills. However, the research illustrates that when it comes to
issues like acquisitions and the business compensation culture, the young CEO are
accorded a stronger incentive which might lead to overinvestment and
destructions of the firm’s value (Bebchuk, et al., 2011). Being that the
compensation scheme can provide a different nature of incentive for different
CEOs, its relevant for the board to review the compensation incentive to a person
rather than the firm
ii) Determination of the audit fees
Historically business managers were responsible for negotiating and determining
the audit fees, this led to the auditors losing their independence to the managers.
In 2003 the SEC made regulations which transferred the duties of negotiating and
setting the audit fees to the audit committees. Despite the introduction of the
Sarbanes Oxley Act of 2002, a number of auditors are reporting that management
is still in control of the business relationship with the external auditors (Cohen, et
al., 2010). As per the accounting regulations, the audit committee is the one tasked
with negotiation and determination of the audit fees. The current revelations by
some auditors is giving an idea that investors are given a false sense of security by
the accounting standards (Beck & Mauldin, 2014).
The benefits of explicit consideration of the executive incentive scheme in the
auditing tasks has been stressed by the regulating bodies as evident by their
concern that compensation is the major contributor of the experienced accounting
scandals (Billings, et al., 2014). Considering that the managers equity has a direct
influence on the business risks, the managers are suggested to have an incentive to
control the auditor’s risk assessment of the business. The demand by the auditing

T e mpact o a e o A tralian li ted companie on t e a dit ee c ar ed t e a ditorh I f CEO g f us s s h u f s h g by h u s
standards that the auditors assess the company’s executive compensation scheme
and provide a report of the assessed risks is an evident of the case.
As per the research conducted by (Billings, et al., 2014), adequate evidence was
found to indicate that auditors do raise the cost of their services as a response of
CFO equity incentives. This gives an indication that the auditors do view
heightened audit risks as a product of the CFO equity incentives.
It is therefore vital to consider the executive incentive schemes so as to improve
the understanding of auditors’ behaviour when it comes to assessment of risks and
making pricing decisions in accordance to the current auditing standards.
Following heightened regulations designed to control accounting standards due to
the early 2000s scandal, there is a recognition of the CFOs as actors who are
accountable for generation of quality financial statements (Alali, 2011). The firms
thereby need to be more cautious when it comes to compensating the CFOs by
means of equity-based tools.
3. Development of Hypothesis
1st: CEOs overconfidence and the audit fees
H1: young managers are overconfidence
A number of CEOs are under the impression that their firms are is a better position to
succeed than the other companies operating in the industry. This scenario is referred to as
overconfident.
Two of the major conflicts affecting audit professionals are identification of the minimum
audit fees as well as breaking down the rate by a number of audit institutions. These
techniques are however only efficient in nations with economical competition where
monopolies do not have to dictate the minimum wages.
Being that auditors’ financial interests are determined by the wage they obtain from their
contacts with the corporations, they employ a number of factors so as to price the services
they offer. A lot of studies have been put in place so as to assist highlight these factors.
Some of the descriptive factors which have been considered in majority of the studies
include; risks, volume and complexity of operations of the department being audited
(Rajabi, et al., 2008). From the previous studies it is indicated that the young CEO have
motivations to keep their career at state by showing their career to be higher than in
reality. This is in anticipation that the current unfavourable outcomes will be

T e mpact o a e o A tralian li ted companie on t e a dit ee c ar ed t e a ditorh I f CEO g f us s s h u f s h g by h u s
compensated by future better performance. One of the greatest contributors of this form
of self-deception is the issue of overconfidence.
Overconfidence is a factor which auditors view as one of the contributors of risk to the
firm. In case where the CEO is likely to have the overconfidence traits, auditors tend to
increase the fees of their services to cater for this risk (Ebrahimpour & Sarouklaei, 2016).
In this regard we thereby seek to highlight the relationship between the young managers
and the overconfidence issue. This will assist us link the risk associated with the
managers overconfidence to the age of the CEO.
2nd: Age, strategic decisions and audit services prices
H2: Young CEOs attract higher audit fees
There are a number of research literature that predicts that the age of managers has a
direct impact on their intensity of pursuing specific strategic decisions. In some cases,
younger managers are suggested to portray aggression and risk aversion when dealing
with riskier ventures. During their young age, CEO’s tend to be pressured to display their
talent to the world with an intention of showcasing that they are capable of competing and
even doing better than the old veterans for this they tend to be ready to make very risky
but potentially profitable decisions. This way they try to convince themselves that they
possess additional talent in relation to the aged CEOs. On the other hand, old CEOs are
normally reluctant to shift their investment decision making as they are more confident on
the techniques that their past experience have enabled them to excel in. while considering
the roles of managers background in the organizational outcome it was discovered that
the young managers are associated with unprecedented risk taking actions (Andreou, et
al., 2016).
Aged CEOs are occasionally are in a situation where they tend to give more utility to the
financial and career security and may not be willing to risk losing all for the sake of
trying a riskier investment strategy (Huang, et al., 2012). Old age is also associated with
reluctant to change and maintenance of the status quo. As the managers age they tend to
lose the mental and physical stamina that can allow them learn new behaviours. In
addition, their operation experience forces them to seek and evaluate information
intensively before deciding.

T e mpact o a e o A tralian li ted companie on t e a dit ee c ar ed t e a ditorh I f CEO g f us s s h u f s h g by h u s
The above identified behaviours tend to correlate with the firms’ risk status, a factor that
auditors do consider when pricing their services. Thereby will test the second hypothesis
that young CEO attract higher audit fees.
4. Research methods
a) Sources of information to be used to gather relevant data
The information pertaining to the audit fees, auditors, non-audit fees as well as
internal control will be obtained for the period between 2007 to 2017. The sample
of interest will be the companies listed in Australia. The CompStat will be a valid
source for extracting financial and segment information. This information will be
in accordance to various regulatory and accounting rules.
The other variable of interest is the age of the CEOs, this will be derived from
ExecuComp for a similar period as that of audit fees information. More
information regarding the variables will be derived from the Australian securities
exchange market to assist interpret and make conclusions regarding the study
variables.
b) Sampling techniques
The companies of interest are those listed in the Australian securities exchange.
When collecting the data regarding their CEOs and the associated audit fees
expenses will apply random sampling to select the data. The data from the recent
years, that is 2007-2017 will be used so as to ensure the study findings reflect the
current trends in the market. The use of random sampling to select our data
sample will assist come up with a data set which will give the best representation
of the entire population.
The confounding auditor type effect rule will exclude non-big 4 accounting
entities as well as joint audits as they are affected with complications of how the
audit fees are determined. Under the joint audits two auditors from diverse firms
are supposed to sign the audit report as jointly liable for the opinion issued. In
addition, financial sectors and financial years which lack complete information
will be disregarded from the sample data. The final sample will there after be
computed and the information collected for purpose of analysis.
c) Definition of variables

T e mpact o a e o A tralian li ted companie on t e a dit ee c ar ed t e a ditorh I f CEO g f us s s h u f s h g by h u s
In this study the focus is on the ways in which the age of the organisation CEO
impact on the service fee charged by the auditing firms. For this purpose, our
study dependent variable will be the audit fees. The age of the CEOs is the
independent variable which will be affecting the relevant audit fee.
Variables to be controlled
Through the past studies several factors have been highlighted to be responsible
for the audit fees. Some of this include size of the firm, complexity of operations,
riskiness and other special instructions demanded by the clients. The variables to
be controlled will thereby be classified under four major categories. First category
will be made of client financial factors that may interfere with the auditors pricing.
Here will include size, segments, foreign, leverage level. The next category is
concerned by the requirements of the Sarbanes-Oxley Act. In recent studies it has
been observed that auditors are pricing the control risks that are generated by the
material weaknesses of the internal control system (Hogan & Wilkins, 2008). In
the third category we classify non-audit charges, this involves the quality of the
audit, specialisation of the industry and the auditor tenure. The fourth category is
included to account for agency as well as contractual issues which are concerned
with pricing of audit services. This will control effects which rise from monitoring
done by the board of directors which is evident by presence of external directors
on the board. The external monitoring by the institutional investors also fall under
this category.
d) Models to be used to examine the hypothesis
To test the hypothesis set, will apply a number of models. This will assist derive
the necessary relations that can be applied in making the necessary conclusions.
One of the models that will be put in place will be the regression model.
This will assist test the correlation of the two variables i.e. the dependent and
the independent variable. By testing the correlation and regression will be able
to analyse if there exist any association between the two variables of interest.
Furthermore, will use the ANOVA test and t test to examine the inferential
relationship between the variables.
5. Conclusion

T e mpact o a e o A tralian li ted companie on t e a dit ee c ar ed t e a ditorh I f CEO g f us s s h u f s h g by h u s
Human development is a phenomenon that takes place with age, this development is
normally accompanied by physical, emotional and spiritual changes that affect how we
behave at each stage of life. CEO being part of the human race are affected by this
change. Their age does have a lot of influence on how they approach management tasks.
For instance, from past studies a lot of evidence have been acquired to indicate that the
age of a CEO will determine how they perceive risk taking in business operations. Young
CEO tend to possess a lot of physical and emotional stamina that makes them aggressive
investors. They possess risk taking traits ready to pursue risky investments to optimise
their performance.
Also, old age is characterised by experience, skills and knowledge that is developed with
time along the career path. For this reason, the old CEO tend to take time to verify their
steps and information before making investment decisions. This makes them averse to
risks.
Having analysed the association between age and business risks, we are thereby interested
in developing models which can assist expend on the knowledge regarding the association
between the age of the CEOs and the auditor’s pricing of their services to the firms.

T e mpact o a e o A tralian li ted companie on t e a dit ee c ar ed t e a ditorh I f CEO g f us s s h u f s h g by h u s
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