CEO Turnover and the Engagement Quality Reviewer’s Audit Effort

Abstract

Previous literature on the engagement quality (EQ) review argues that EQ reviewers should provide more efforts into the review process when fieldwork auditors’ judgments and conclusions on the financial statements are potentially biased. Little empirical study has been done, however, partly due to the confidentiality of the detailed data on EQ reviewers’ audit hours. The purpose of the article is to shed light on the existing literature by conducting an empirical investigation using a unique actual data set available in Korea. The results show that the EQ review hours are positively associated with CEO turnovers, a proxy for the audit risk, which supports the prediction of the theory on the EQ review. Additional analyses show that such results are stronger under (a) the upward earnings management and (b) the forced CEO turnover. The article extends the existing literature on the EQ review process and enhances the understanding of the engagement-level quality control in the volatile audit environment by providing empirical evidence to the analytic discussions on the EQ review.

Effects of carbon emissions on audit fees

“…Jung (2016) also suggests that auditors detecting a higher market-perceived information risk associated with a particular client tend to increase their audit effort for engagement. Kim et al (2021) discover that a more extensive engagement quality review is performed for audits with firms exhibiting a high CEO turnover, often a sign of firm instability and financial risk. Finally, Rosati et al (2019) document that audit firms raise their audit effort for affected firms after cybersecurity incidents, indicating a higher technological risk.…”