Investigating the Correlation Between CEO Age and Audit Pricing

This report explores the relationship between CEO age and audit pricing, focusing on how CEO characteristics, particularly age, influence auditing decisions. The study hypothesizes that older CEOs, being more risk-averse and experienced, tend to prefer higher-quality audits, potentially leading to higher audit fees. The research methodology involves collecting data from the top 100 ASX-listed firms over five years, analyzing CEO age and audit fees using correlation and regression analyses. The study also considers control variables like firm risk, financial leverage, and operating leverage to provide a comprehensive understanding of the factors influencing audit pricing. The expected findings aim to reveal whether there is a significant correlation between CEO age and audit pricing, contributing to the understanding of corporate governance and financial reporting quality. Desklib provides access to similar solved assignments and past papers for students.

Running head: PROFESSIONAL RESEARCH AND ANALYSIS
Professional Research and Analysis
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Table of Contents
Development of Hypothesis.......................................................................................................2
Research Methodology...............................................................................................................5
Conclusion..................................................................................................................................7
References..................................................................................................................................8

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Development of Hypothesis
Based on the standpoint of individual characteristics of CEO, this current paper indicates
towards the demographic research technique to assess whether CEO age exerts impact on
overall disbursement of premiums audit fee to different auditors who express “high quality”
indications.
However, it can be hereby observed from the prior literature on determinants of audit fees
that audit fees determinants can be enumerated from client of audit as well as auditor level.
Based on the standpoint of the association between the corporation and fees for audit, it can
be observed that corporations that deliver “superior quality” indications to market have the
tendency to obtain premium level audit fees. For instance, “Big 4” can be observed to obtain
higher fees for audit in comparison to other corporations (Leventis et al. 2018).
Fundamentally, it is worth observing that these kinds of studies are founded on an implied
supposition that assessors at the corporation deliver the same quality of audit and accept the
equal level of audit fees. In essence, this is opposing to the inferences drawn by the subsisting
literature of individual characteristics of auditors, that divulges the fact that there are
variances among assessors and their individual features work directly on different cognitive
styles along with behaviours of decision-making and in that way exerting impact on quality
of audit (Huang et al. 2014).
The current study essentially intends to analyse the way individual features of CEOs
(particularly age is taken into consideration in this regard) affect the decision making
regarding auditing of firms. Sundgren and Svanström (2014) suggest that age is a wild card of
leadership since head-hunters as well as corporate boards think over trade-offs namely energy
level vs. wisdom. It can be observed that an experienced and aged CEO might perhaps help a
firm to avert repeating mistakes; however, on the other hand, the flexibility of young and

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youthful CEOs might perhaps be significant in a situation of speedy adjustments (Sundgren
and Svanström 2014). “As anticipated, it was observed from an interaction between
particularly situation and age, participants of a study approved older leaders over the younger
ones for preserving stability and young leaders over older ones for assisting in bringing about
change as per the journal “The Leadership Quarterly”. As per prior reports, it can be said that
there are significant differences in attitudes between an old and young CEO. The old ones
have greater experience and tend to be risk averse and have the inclination to carry out
appropriate audit that can alleviate risks of business. For that reason, they have a tendency to
auditors with specialized know-how, higher efficiency and better reputation. (Chen et al.
2015). Managers are essentially negotiators of fees of audit and have authority to make
judgement regarding selection of services of audit. The subsisting literature reveals that
assessors charge higher amount of fees when they observe an enhancement in audit as well as
risk of business in a particular audit engagement (Huang et al. 2014). Therefore, there arises
a debate between energy, knowledge, maturity, risk aversion, horizon issues of CEOs that
affect the selection of auditors of firms and pricing of audit.
Provided that CEOs of firms do not characteristically decide corporate strategies alone but
makes judgements as a member of the entire team, therefore, the risk preference of diverse
other senior officials can also contribute towards overall profile of risks of firms. In case, if
age of an executive exerts impact on preferences of risk, then executives belonging to similar
group of age as the firm’s CEO must reinforce CEOs’ risk-taking behavior. Hrazdil et al.
(2018) examined whether preferences of risk affect risk-taking behavior of particularly
CEOs. However, it could be observed that firm risk can be recorded to be the lowest at the
time when both the CEO and influential executives are necessarily older. Na and Hong
(2017) suggest that the financial background of firms’ CEOs also alleviates the risk of firm’s
poor performance and existent risk of failures of firms. Also, the background of different

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CEOs, particularly their risk inclinations are also said to enhance overall quality of financial
reporting that lessens over possibility of material misstatements, thereby decreasing the risks
associated to the engagement of audit. Essentially, decline in the business along with audit
risks are said to translate into low audit fees.
Thus, audit fees determinants cannot be enumerated only at the level of firm, but also need to
be considered at the individual point as well (Lin et al. 2014). Thus, this current paper
intends to study specific determinants of fees for audit or audit pricing at individual level
based on specific characteristic of CEOs (that is to say, the age of CEOs).
1) Age
Age normally exerts impact on the propensity of risks. There are certain scholars who are of
the view that elder individuals are likely to be more mature and don’t prefer risks. Choi et al.
(2018) state that tendency of risk declines linearly as per age, and the elder individuals have
greater sensitivity to particularly economic risk. Thus, during the period of real audit
procedure, elder assessors are necessarily more vigilant than younger assessors. Similarly,
elder CEOs also tend to prefer lesser risks and intend to ensure higher quality of audit of their
firms that might involve higher fees. Thus, we make the hypothesis:
H1: Age of CEO has a substantial positive correlation with audit pricing or fees of audit
Research Methodology
Data Collection
The variable that is of interest in this current paper is the age of CEOs of firms. For that
purpose, age of CEOs of top 100 selected firms listed in the Australian Stock Exchange can
be acquired directly from published database (annual report) and different missing values can
be found out online over a period of 5 years. Again, the natural logarithms of the age of

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CEOS can be utilized in different multivariate regressions (Leventis et al. 2018). Thereafter,
prices of audit (that is complete data on fees of audit in Australia) of the selected firms can be
gathered from the official reports disclosing their audit fees (that is obligatory as per
regulation). This data on audit fee can be obtained from published reports of companies
(Hrazdil et al. 2018). Again, total risk of the firm can be computed by means of the variable
that is the stock volatility investigated over a 1 year period by gathering closing prices (on a
monthly basis). Monthly closing prices for the year 2017 can be collected for 100 firms and
annualised rate of standard deviation can be utilized as a specific measure of overall
volatility.
We divide the sample into different parts. The CEO ages above the age of 50 years can be
considered to be aged and indicated as “1”and CEO ages below the age of 50 years can be
stated to be not aged and indicated as “2”. For this CEO background information (particularly
age)of the 100 selected companies can be gathered. However, in order to assess the effect of
age of CEOs on fees of audit, correlation and regression analysis can be carried out among
the variables under consideration (Age of CEOs in 100 firms and audit fees in the firms).
Sampling Technique
Among the Top 200, ASX listed firms, 100 ASX listed firms will be selected as the sample
for the study. Probability sampling refers to a sampling technique where different subjects of
the targeted population acquire an opportunity to get selected. Based on the selected firms,
the data of age of CEOs and the fees for audit can be calculated (Sundgren and Svanström
2014). Thereafter, after collection of requisite data, summary statistics of the acquired data
are presented for CEO age and audit pricing that are expressed in Australian dollars. The data
obtained will be analysed using Microsoft Excel and SPSS.
Definition of variables

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The learner intends to examine the nature of association between age of CEOs and fees of
audit for the firms. The Age of CEOs is considered as the independent variable and the fees
of audit as the dependent variable. Correlation matrix can be enumerated for the identified
variables and regression analysis can be undertaken from analysis using SPSS (Ittonen et al.
2015). The hypothesis developed based on review of prior literature leads to a prediction that
age of CEO is negatively associated to volatility of stocks as older CEOs tend to be risk
averse. Therefore, risk averse CEOs have the tendency to superior quality audit for reduction
of business risks and have the inclination to spend higher amount as audit fees (Duellman et
al. 2015). As a result, there need to be positive association between age of CEO and audit
fees.
In this case, it can be said that natural logarithm of audit fees is the dependent variable and
natural logarithm of age of CEOs is the independent variable. However, the control variables
are also present in this case that refers to the variables that are not of much interest but are
associated to the dependent variables (Kalelkar and Khan 2016). For the purpose of the
present study, the control variables are volatility of firm’s stocks (indicating risks parameter),
financial leverage (risk dimensions) and operating leverage.
Models to be utilized to examine the hypothesis/ hypotheses
The learner intends to analyse results from regression associating to age of CEO to audit
pricing for 100 firms listed under ASX for last 5 years (2013 to 2017). Different descriptive
statistics will be used for elucidating CEO age categories (above the age of 50 years and
below the age of 50 years. The mean age difference between oldest CEOs and the youngest
CEOs utilizing a t-test can be examined and placed next to the value of mean of the oldest
CEO values. Assuming a specific significance level of 0.05, the learner intends to examine
whether the significant values are higher than 0.05 (Huang et al. 2014). However, based on

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this result, the learner will be able to state whether the oldest and the youngest CEOs age
groups differ significantly among this tested variables (using t test) (Chen et al. 2015). The
model for the study includes Log Audit Pricing as dependent variable. Different control
variables include volatility of firm’s stocks, financial leverage (debt/equity) and operating
leverage. The model of the study examining the association between age and audit pricing
shall present the coefficient results from the study of regression (that is to say, relation
between age of CEOs and audit pricing).
Conclusion
The study intends to examine the nature of association between the age of CEOs and audit
pricing. The findings of the obtained result shall be explained and remarks will be presented
regarding importance of the same. Based on theoretical premises it can be seen that the old
CEOs have considerably higher experience, know-how and level of maturity and are likely to
be risk averse. This shows the way towards their inclination to undertake superior quality of
work of audit by specialised assessors even with higher fees so as to ensure that the audit can
alleviate business risk encountered. It is for this reason; they have a tendency to hire auditors
with specialized skills, superior efficiency and reputation to carry out superior quality audit
and even without negotiation of audit fees. Thus, this study devises a hypothesis that
highlights examination of effect of age of CEO on pricing of audit. It is seen that audit
opinions that are signed in the nation Australia and divulging audit fees in AUD-Australian
dollars have enhanced from AUD183m to roughly AUD518m during the period 2000 to
2011. Therefore, this study intends to study the age of CEOs in the ASX listed firms from
composition of the board (mentioned in company reports) and their respective fees
(mandatory disclosure). This way the learner intends to examine the positive association
between age and pricing of audit.

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References
Chen, Y., Gul, F.A., Veeraraghavan, M. and Zolotoy, L., 2015. Executive equity risk-taking
incentives and audit pricing. The Accounting Review, 90(6), pp.2205-2234.
Choi, Y.S., Hyeon, J., Jung, T. and Lee, W.J., 2018. Audit pricing of shared
leadership. Emerging Markets Finance and Trade, 54(2), pp.336-358.
Duellman, S., Hurwitz, H. and Sun, Y., 2015. Managerial overconfidence and audit
fees. Journal of Contemporary Accounting & Economics, 11(2), pp.148-165.
Hrazdil, K., Novak, J., Rogo, R., Wiedman, C.I. and Zhang, R., 2018. Measuring CEO
Personality Using Machine-Learning Algorithms: A Study of CEO Risk Tolerance and Audit
Fees.
Huang, H.W., Parker, R.J., Yan, Y.C.A. and Lin, Y.H., 2014. CEO turnover and audit
pricing. Accounting Horizons, 28(2), pp.297-312.
Ittonen, K., Johnstone, K. and Myllymäki, E.R., 2015. Audit partner public-client
specialisation and client abnormal accruals. European Accounting Review, 24(3), pp.607-633.
Kalelkar, R. and Khan, S., 2016. CEO financial background and audit pricing. Accounting
Horizons, 30(3), pp.325-339.
Leventis, S., Dedoulis, E. and Abdelsalam, O., 2018. The impact of religiosity on audit
pricing. Journal of Business Ethics, 148(1), pp.53-78.
Lin, Y.C., Wang, Y.C., Chiou, J.R. and Huang, H.W., 2014. CEO characteristics and internal
control quality. Corporate Governance: An International Review, 22(1), pp.24-42.

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Na, K. and Hong, J., 2017. CEO Gender And Earnings Management. Journal of Applied
Business Research, 33(2), p.297.
Sundgren, S. and Svanström, T., 2014. Auditor‐in‐charge characteristics and going‐concern
reporting. Contemporary Accounting Research, 31(2), pp.531-550.