Managerial Auditing JournalCorporate executive’s gender and audit feesTing-Chiao Huang Hua-Wei Huang Chih-Chen Lee

Article information:To cite this document:Ting-Chiao Huang Hua-Wei Huang Chih-Chen Lee , (2014),"Corporate executive’s gender and audit fees",Managerial Auditing Journal, Vol. 29 Iss 6 pp. 527 - 547Permanent link to this document:http://dx.doi.org/10.1108/MAJ-03-2013-0837

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Corporate executive’s genderand audit fees

Ting-Chiao Huang and Hua-Wei HuangDepartment of Accountancy, National Cheng Kung University, Tainan,

Taiwan, and

Chih-Chen LeeDepartment of Accountancy, Northern Illinois University, DeKalb,

Illinois, USA

AbstractPurpose – The purpose of this study is to investigate the association between a corporate executive’sgender and audit fees. Based on the findings of extant research that there are gender-based differencesthat may have implications for the financial reporting process, the authors posit an association betweenCEO gender and audit fees.Design/methodology/approach – The authors test their hypothesis by performing both univariateand multivariate regression analyses on a sample of 8,402 Compustat firm-year observations from USfirms for 2003-2010.Findings – The authors’ findings indicate that firms with female CEOs are associated with higheraudit fees. Their results hold after controlling for self-selection bias and factors shown by prior studiesto be associated with audit fees.Research limitations/implications – Although the authors control for factors that would increaseaudit fees, their study is limited by the degree to which higher audit fees reflect higher quality audits.Also, because their sample is from large publicly traded nonfinancial firms, their results may not beapplicable to other types of firms. The authors study has implications for policy setting because theirfindings provide some evidence of a significant association between a CEO characteristic (gender) andfinancial reporting quality. Their findings, thus, provide some support for the Securities and ExchangeCommission requirement that CEOs should certify their firm’s financial statements.Originality/value – The authors study contributes to the audit fees and corporate governanceliterature by providing empirical evidence of an association between audit fees and CEO gender. Totheir knowledge, no study, to date, has investigated this association.

Keywords Corporate governance, Board of directors, Audit fees, Gender diversity, Audit committee,CEO gender, CFO gender

Paper type Research-paper

IntroductionThe purpose of this study is to investigate the association between a corporateexecutive’s gender and audit fees. Specifically, we examine the association between achief executive officer’s (CEO’s) gender and audit fees. Our study is motivated by:

• prior psychology, management, finance and accounting research, suggesting thatthere are significant gender-based differences which may have importantimplications for the financial reporting process;

JEL classification – M4

The current issue and full text archive of this journal is available atwww.emeraldinsight.com/0268-6902.htm

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Managerial Auditing JournalVol. 29 No. 6, 2014

pp. 527-547© Emerald Group Publishing Limited

0268-6902DOI 10.1108/MAJ-03-2013-0837

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• the certification requirements of the Sarbanes–Oxley Act (SOX) of 2002; and• the desire to provide further insights into the association between the

characteristics of corporate executives and the financial reporting process.

The accounting scandals of the early 2000s (e.g. Enron and WorldCom) led to thepassage of SOX. One goal of SOX is to increase the accountability and responsibilities ofcorporate executives. For example, the CEO and the chief financial officer (CFO) ofSecurities and Exchange Commission (SEC) registrants must now certify their firm’sfinancial statements. This has led to a line of research that investigates thecharacteristics of corporate executives and the effects of these characteristics on thefinancial reporting process. Our study extends this line of research.

Although SOX requires that the CEO must certify his/her firm’s financial statements,it is the audit committee’s responsibility to select the auditor, negotiate audit fees andoversee the audit function. SOX’s aim in separating the audit function frommanagement is to ensure the integrity of the financial statements. For the auditcommittee to be effective in its duties, SOX requires the audit committee to beindependent from management. One could, therefore, argue that in the post-SOX period,the CEO should have no effect on the demand for audit services or audit fees because theCEO should have no control over the audit committee. The problem, however, is that inevaluating the independence of the audit committee, focus is normally placed oneconomic independence. It is possible, however, for the audit committee to beeconomically independent but not substantively independent. Cohen et al. (2010) notethat even though the audit committee may meet the regulatory requirements ofindependence, it may not be substantively independent because the CEO may haveundue influence in the selection of the audit committee members and may nominateindividuals with whom he/she has personal or professional ties. In their study,investigating corporate governance in the post-SOX period, Cohen et al. (2010) find thatin some instances, contrary to the intent of SOX, management is the driving force behindauditor appointments and terminations.

Beasley et al. (2009) note that audit committee members are often asked to servebecause of their ties to management or other board members and Carcello et al. (2011)report that CEO involvement in board selection reduces audit committee effectiveness.Cohen et al. (2011) note that the theory of managerial hegemony states that boards areoften under management’s control and exist merely to fulfill regulatory requirements.Cohen et al. (2011) also note that all the members of Enron’s audit committee would havemet current independence requirements, even though several members had ties withsenior management. Cohen et al. (2011), in an experimental study, also find that auditorsconsider CEO influence on audit committee independence in making audit decisions. Insummary, these studies suggest that even though audit committees may meetregulatory requirements of independence, it is still possible for them to be influenced bymanagement.

If the CEO is involved in the selection of the audit committee and the CEO isconcerned about audit quality, he/she could make sure that the selected audit committeemember shares his/her level of “conservatism” and, consequently, would“independently” make similar choices as the CEO or the CEO could select a committeethat he/she could tell what to do. Intuitively, one would expect a CEO, in the post SOXperiod, to be very concerned about the quality of his/her firm’s financial statements

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because he/she must certify these statements. Assuming the CEO has some influenceover the audit committee, a more risk averse CEO is more likely to try to influence theaudit committee to purchase a higher quality audit to protect his/her reputation andavoid legal liabilities. Higher quality audits are generally provided by increased auditeffort and/or higher quality auditors, both of which result in higher audit fees.

Extant literature suggests that there are significant gender-based differences thatmay have implications for the financial reporting process. Prior research indicates thatfemales are more risk averse than males (Powell and Ansic, 1997; Jianakoplos andBernasek, 1998; Byrnes et al., 1999; Bernasek and Shwiff, 2001; Barber and Odean, 2001).It could, therefore, be argued that firms with female CEOs are more likely to pressure theaudit committee to purchase higher quality audits than firms with male CEOs, leadingto higher audit fees for such firms.

On the other hand, it could also be argued that because females are more risk aversethan males, auditors may view firms with female CEOs as having less inherent risk offinancial misstatements and, therefore, be willing to reduce the scope of the auditleading to lower audit fees. This notion is supported by Ittonen et al. (2008) who reporta negative association between female representation on the audit committee and auditfees. They suggest that female representation on the audit committee reduces theinherent risk of financial misstatement by improving the effectiveness of internalcontrol activities and generally enhancing the integrity of the financial reportingprocess. Extant literature also suggests that female corporate executives and femalerepresentation on the board of directors are associated with higher quality financialreporting (Barua et al., 2010; Abbott et al., 2012; Srinidhi et al., 2011), which could lowerthe auditors assessment of the firm’s inherent risk leading to lower audit fees for firmswith female corporate executives. We, therefore, do not hypothesize a direction on theassociation between CEO gender and audit fees.

We examine our hypothesis by performing both univariate and regression analyseson a sample of 8,402 firm-year observations from US firms for the test period 2003 to2010. Our results indicate that firms with female CEOs are associated with higher auditfees. Our results hold after controlling for self-selection bias and factors found by priorstudies to be associated with audit fees. Finally, we find weak evidence that audit feesare higher when the CFO is a woman.

Our study contributes to the literature by providing empirical evidence of anassociation between audit fees and CEO gender. To our knowledge, no study, to date,has investigated this association and, therefore, this study extends the audit fees andcorporate governance literature. Additionally, our study has implications for policysetting because the findings suggest that although SOX tried to enhance the integrity ofthe financial reporting process by separating the audit function from management, it isstill possible for management to influence audit quality. Our evidence also contributes tothe growing stream of research that investigates how executives’ gender influencesfinancial reporting issues. For example, Barua et al. (2010) report that firms with femaleCFOs are associated with better accruals quality than those with male CFOs. Our studyreinforces extant literature by demonstrating that female executives demand betteraudit quality and more audit services. This is reflected in the increased audit fees.Besides, we extend the previous studies that separately investigate the effect ofdirectors’ gender diversity on audit fees by considering both CEO gender and CFOgender at the same time.

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The remainder of the paper is organized as follows. The next section provides theliterature review and development of hypothesis. This is followed by a discussion of theresearch method and data. We then present the empirical results followed by sensitivitytests and additional analyses. Finally, we present a summary of our findings andconclusions.

Literature review and hypothesis developmentA major line of audit research has focused on the determinants of audit fees (Simunic,1980; Simunic and Stein, 1996; Carcello et al., 2002; Abbott et al., 2003; Charles et al.,2010). These studies suggest that audit fees reflect the economic costs of the auditor.Simunic (1980) and Carcello et al. (2002) suggest that, in setting audit fees, auditors seekto minimize their total costs by balancing the costs of performing the audit with the costsof expected future losses from legal liability. Increased audit effort will decrease theprobability of future losses from lawsuits. Increased audit efforts will, however, increaseaudit fees, as the auditor passes on additional costs to the client. Firms desiringadditional assurance beyond the auditor’s cost minimizing level would demand a higherquality audit resulting in higher audit fees.

Prior research suggests that corporate executives will want higher quality audits:• if they wish to protect their reputation capital (Fama, 1980);• if they are concerned about future losses from lawsuits (Eichenseher and Shields,

1985); and• as long as the marginal benefits exceed the marginal costs, especially because the

corporate executives do not directly pay for the audits (Carcello et al., 2002).

Higher quality audits result in higher audit fees.Extant research also indicates an association between corporate executive’s

characteristics and audit fees. Muniandy (2007), in a study using a sample of 447Malaysian firms, reports a positive association between CEO duality and audit fees[1].Muniandy (2007) also reports that the positive association between CEO duality andaudit fees is mitigated by the presence of a higher proportion of outside directors on theaudit committee. This finding is supported by Hermalin and Weisbach (1998), who notethat the most important factor affecting the effectiveness of the board of directors is itsindependence from the CEO (see also Carter et al., 2003; Erickson et al., 2006). They arguethat a less effective board would increase the auditor’s assessment of firm risk, leadingto an increase in audit fees (Krishnan and Visvanathan, 2009). Mitra et al. (2007) in astudy examining the association between ownership characteristics and audit feesreport a negative association between managerial stock ownership and audit fees. Theyargue that the negative association may be attributed to a decrease in the auditor’sassessment of inherent risks for firms with high managerial ownership.

Extant psychology, management and finance research document that there aresignificant differences in the risk preferences of males and females (Powell and Ansic,1997; Jianakoplos and Bernasek, 1998; Byrnes et al., 1999; Bernasek and Shwiff, 2001;Barber and Odean, 2001). Powell and Ansic (1997) report that females are more riskaverse and cautious than males regardless of costs, familiarity or ambiguity. Baldry(1987) notes that females are more likely to be in compliance with rules and regulationsthan males and Huang and Kisgen (2013) suggest that females are more cautious inevaluating the acquisition and issuance of debt. They report that firms with female

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CFOs issue less debt than firms with male CFOs. Schubert (2006) also suggests thatfemales are more likely to try to avoid losses and are less inclined to take extreme risks.

Prior research also shows that females are more risk averse than males when makinginvestment decisions (Cohn et al., 1975; Riley and Chow, 1992). They are likely to choosemore cautious options for retirement (Watson and McNaughton, 2007). Femalesemphasize risk reduction more than males when making financial decisions (Olsen andCox, 2001; Fehr-Duda et al., 2006). They are also less prone to overconfidence in financialjudgments (Barber and Odean, 2001). They are more effective communicators and theygenerate higher quality solutions in group problem solving requiring consensus (Woodet al., 1985).

Extant accounting literature has also investigated the association between thecharacteristics of corporate executive’s gender and the financial reporting process.Barua et al. (2010) report an association between CFO gender and accruals quality. Theyfind evidence to support the notion that companies with female CFOs have higherquality accruals and lower absolute accrual estimation errors than companies with maleCFOs. Thiruvadi and Huang (2011) find that the presence of female directors on theaudit committee constrains earnings management by increasing the use ofincome-decreasing discretionary accruals. Krishnan and Parsons (2008) show that firmprofitability and stock returns following initial public offerings are positively associatedwith gender diversity in senior management.

In summary, these studies suggest that females are more conservative and riskaverse than males. They are more likely to comply with rules and take action to avoidlosses. Accordingly, it could be argued that female CEOs are likely to require higheraudit assurance than male CEOs, to protect their reputation and to guard against futurelosses from lawsuits. They are, therefore, more likely to try to influence the auditcommittee to purchase higher quality audits. This may be particularly importantbecause SOX requires the CEO to certify the firm’s financial statements. Higher qualityaudits require additional audit work which leads to higher audit fees as the auditorpasses along the additional costs to the client. This suggests that firms with femaleCEOs are associated with higher audit fees.

On the other hand, it could be argued that because females are more cautious and riskaverse than males, a female CEO may influence the auditor’s assessment of the integrityof the firm’s financial reporting process. The auditor may view a firm with a female CEOas having less inherent risk of financial misstatements and, therefore, be willing toreduce the scope of the audit leading to lower audit fees. This suggests that firms withfemale CEOs are associated with lower audit fees. The direction of the associationbetween CEO gender and audit fees is, therefore, an empirical question. We, therefore,posit our hypothesis:

H1. There is an association between CEO gender and audit fees.

Research methodTo examine the association between audit fees and corporate executive’s gender, weemploy the following modification of the cross-sectional audit fees model used inCarcello et al. (2002)[2] to test our hypothesis:

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LnFEES � � � �1CEOGENDER � �2BDFEMALE � �3LnASSETS

� �4REINTA � �5SQSEG � �6 FORN � �7ROA � �8GC � �9MW

� �10RESTATE � �11CHAIR � �12ACEXPCT � �13ACFMPCT

� �14BDSIZE � �15BDINDPCT � �16BIG4 � �17SPEC

� �18ABSDACC � Year_D � Industry_D � �

(1)

Where:

LnFEES � natural logarithm of audit fees reported on AuditAnalytics.CEOGENDER � 1 if the CEO is female, else 0.BDFEMALE � 1 if there is at least 1 female on the board of directors, else 0.LnASSETS � natural logarithm of total assets.REINTA � percentage of total assets in receivables and inventories.SQSEG � square root of number of business segments reported on

Compustat.FORN � 1 if foreign segments reported, else 0.ROA � return-on-assets.GC � 1 if the firm receives a going concern report, else 0.MW � 1 if there are material weaknesses in internal controls, else 0.RESTATE � 1 if there is a restatement in the current or prior year, else 0.CHAIR � 1 if the CEO is the chairman of the board of directors, else 0.ACEXPCT � percentage of audit committee members that are financial experts.ACFMPCT � percentage of audit committee members that are female.BDSIZE � number of board members.BDINDPCT � percentage of independent board members.BIG4 � 1 if the firm is audited by a Big 4 audit firm, and 0 otherwise.SPEC � 1 if the firm is audited by an industry specialist, and 0 otherwise.ABSDACC � absolute discretionary accruals.Year_D � year dummy variables for the fiscal years 2004 through 2010.Industry_D � industry dummy variables based on Fama and French 12 industry

classification.

Consistent with prior studies (Simunic, 1980; Carcello et al., 2002; Abbott et al., 2003;Knechel and Willekens, 2006; Huang et al., 2009), we use the natural log of audit fees asa measure of audit fees. The variable of interest is CEOGENDER. The variable is setequal to one if the CEO is female and zero if male. A significantly positive coefficient onthis variable would indicate that firms with female CEOs are associated with higheraudit fees. This is consistent with the notion that firms with female CEOs demandhigher quality audits. On the other hand, a significantly negative coefficient wouldindicate that firms with female CEOs are associated with lower audit fees, consistentwith the notion that auditors view firms with female CEOs as having lower inherent riskof financial misstatements. We, therefore, do not predict the sign on this coefficient.

We control for factors shown by prior studies to be associated with audit fees.Consistent with prior research, we expect audit fees to be positively associated withfemale board representation, BDFEMALE (Gul et al., 2008)[3]; the natural log of totalassets, LnASSETS (Simunic, 1980; Francis and Wang, 2005; Raghunandan and Rama,

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2006); the proportion of total assets in accounts receivables and inventory, REINTA(Simunic, 1980; Charles et al., 2010); firm complexity measured the square root of thenumber of business segments reported on Compustat (SQSEG) and a dummy variable(FORN) which is equal to 1 if the firm reports foreign segments on Compustat (Simunic,1980; Charles et al., 2010); the receipt of a going concern report, GC (Charles et al., 2010;Raghunandan and Rama, 2006); the disclosure of material weaknesses under SOX 404,MW (Huang et al., 2009); financial restatement, RESTATE (Huang et al., 2009); CEOduality, CHAIR (Muniandy, 2007; Krishnan and Visvanathan, 2009; Hermalin andWeisbach, 1998; Carter et al., 2003; Erickson et al., 2006); board independence,BDINDPCT (Carcello et al., 2002; Beasley, 1996; Abbott et al., 2004); audit committee’sfinancial expertise, ACEXPCT (Carcello et al., 2002; Hoitash and Hoitash, 2009; Abbottet al., 2003)[4]; board size, BDSIZE (Dechow et al., 1996); auditor type, BIG4 and SPEC(Kim et al., 2012; Dao et al., 2012; Fung et al., 2012) and absolute value of discretionaryaccruals ABSDACC (Gul et al., 2003; Alali, 2010).

Consistent with prior research, we expect audit fees to be negatively associated withreturn on assets, ROA (Charles et al., 2010; Simunic, 1980) and female representation onthe audit committee, ACFMPCT (Ittonen et al., 2008). Finally, consistent with priorstudies (Krishnan and Visvanathan, 2009; Gul and Goodwin, 2010), we include Year_Dand Industry_D which are indicator variables to control for potential year and industrydifferences in the demand for audit services.

Sample and dataTable I shows our sample selection process. Our initial sample consists of 14,949firm-year observations from US firms reporting the necessary CEO data on CompustatExecutive Compensation for the period 2003 to 2010. We delete 322 observations withmissing audit fees data from the Audit Analytics database. Consistent with priorresearch, we delete 2,456 observations from financial institutions (SIC code �6000-6999) and 863 observations with missing financial data. We further delete 2,906observations with missing data from Corporate Library database. This results in a finalsample of 8,402 firm-years. The data on audit committee and board of directors wereobtained from Corporate Library database.

Panel A of Table II reports the sample distribution by year. The sample period coversthe eight years 2003 to 2010 with the maximum number of observations 1,275 (15.17per cent) occurring in 2009. The years 2007, 2008 and 2010 were also well representedwith 13.18, 13.71 and 13.68 per cent of the sample respectively. Panel B of Table II showsthe sample distribution by industry using Fama and French’s 12 industry classification(Raman et al., 2013). The sample firms span several industries with the maximumnumber of firm-year observations being 1,929 (22.96 per cent) in business equipment.

Table I.Sample selection

Initial sample from Compustat execucomp 14,949Less: missing fees data (322)Less: financial institutions (2,456)Less: missing financial data\ (863)Less: firms missing from corporate library database (2,906)Final sample 8,402

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Other well represented industries are manufacturing with 1,317 (15.67 per cent) andwholesale, retail and some services with 1,122 (13.35 per cent).

Table III reports the descriptive statistics for the variables used in our regression models.All continuous variables are winsorized at 1 per cent and 99 per cent. For our sample, theaverage audit fee is $1.852 million (not reported in Table III). In all, 2.8 per cent of CEOs arefemale and 10.3 per cent of board members are female. In all, 65.5 per cent of our sample firmshave at least one female on the board of directors. In all, 39.7 per cent of the sample CEOs isalso the chairman of the board of directors. The average board size is 9.10 and 83.0 per centof board members are independent. In all, 37.6 per cent of audit committee members areclassified as financial experts and 11.5 per cent are female. In all, 93.9 per cent of the samplefirms are audited by Big 4 auditors and 29.4 per cent are audited by industry specialistauditors. The average age of sample firms is 42.74 years and the average number of boardmeetings per year is 5.16. The average number of outside directorships is 1.67. For thereduced sample with available CFO gender data (5,718 observations), 8.0 per cent of CFOsare female.

Table IV presents the means, medians and SDs of the variables for the female andmale CEO subsamples. The table also reports univariate tests of differences between thetwo groups using the parametric t-test and the Wilcoxon rank sum test. Of our total

Table II.Sample description

Panel A: sample distribution by yearYear Percentage Observations

2003 8.16 6862004 11.62 9762005 11.75 9872006 12.74 1,0702007 13.18 1,1072008 13.71 1,1522009 15.17 1,2752010 13.68 1,149Total sample 100.00 8,402

Panel B: sample distribution by fama and french’s 12 industry classificationFF12 Industry Percentage Observations

1 Consumer non-durables 6.02 5062 Consumer durables 2.50 2103 Manufacturing 15.67 1,3174 Energy 5.03 4235 Chemicals and allied products 4.03 3396 Business equipment 22.96 1,9297 Telephone and television transmission 2.89 2438 Utilities 5.75 4839 Wholesale, retail, and some services 13.35 1,122

10 Healthcare, medical equipment, and drugs 10.07 84611 Finance 0.00 012 Other 11.71 984Total sample 100.00 8,402

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sample, 233 (2.8 per cent) observations (69 firms) have female CEOs and 8,169 (97.2per cent) (1,368 firms) have male CEOs. The mean audit fee for the female CEOsubsample is $1.6 million dollars and the mean audit fee for the male CEO subsample is$1.9 million dollars (untabulated). Univariate test of differences show that naturallogarithm of audit fees are significantly higher for firms with male CEOs using both theparametric t-test and the Wilcoxon rank sum test (p � 0.05 or better). This is due to thefact that the firms with female CEOs are significantly smaller (p � 0.01 for bothparametric and nonparametric tests). Firms with male CEOs have a higher percentage offemales on the board of directors and more firms with male CEOs have at least onefemale on the board of directors. Firms with female CEOs are older, have lower growthin sales, fewer foreign segments, higher percentage of financial experts on auditcommittees and smaller board sizes. More firms with male CEOs have CEOs who are

Table III.Descriptive statistics

Variables N Mean Standard P1 P25 Median P75 P99

LnFEES 8,402 14.432 1.023 12.155 13.727 14.353 15.114 17.026CEOGENDER 8,402 0.028 0.164 0.000 0.000 0.000 0.000 1.000BDFMPCT 8,402 0.103 0.093 0.000 0.000 0.106 0.167 0.364BDFEMALE 8,402 0.655 0.475 0.000 0.000 1.000 1.000 1.000LnASSETS 8,402 21.358 1.528 18.308 20.259 21.243 22.351 25.300REINTA 8,402 0.241 0.150 0.019 0.119 0.223 0.331 0.691SQSEG 8,402 3.317 3.035 1.000 1.000 2.236 3.873 9.950FORN 8,402 0.691 0.462 0.000 0.000 1.000 1.000 1.000ROA 8,402 0.044 0.094 �0.420 0.022 0.052 0.091 0.247GC 8,402 0.005 0.068 0.000 0.000 0.000 0.000 0.000MW 8,402 0.042 0.200 0.000 0.000 0.000 0.000 1.000RESTATE 8,402 0.229 0.420 0.000 0.000 0.000 0.000 1.000CHAIR 8,402 0.397 0.489 0.000 0.000 0.000 1.000 1.000ACEXPCT 8,402 0.376 0.314 0.000 0.200 0.330 0.600 1.000ACFMPCT 8,402 0.115 0.145 0.000 0.000 0.000 0.250 0.500BDSIZE 8,402 9.095 2.173 5.000 7.000 9.000 11.000 15.000BDINDPCT 8,402 0.830 0.085 0.571 0.778 0.857 0.889 0.933BIG4 8,402 0.939 0.239 0.000 1.000 1.000 1.000 1.000SPEC 8,402 0.294 0.456 0.000 0.000 0.000 1.000 1.000ABSDACC 8,402 0.041 0.039 0.000 0.013 0.030 0.055 0.212FIRMAGE 8,402 42.736 36.718 0.000 16.000 29.000 60.000 158.000SG 8,402 0.112 0.860 �0.451 �0.004 0.078 0.168 0.965MEETING 8,402 5.163 2.654 1.000 4.000 6.000 7.000 9.000OUTDIR 8,402 1.670 0.792 0.550 1.077 1.444 2.091 4.167CFOGENDER 5,718 0.080 0.271 0.000 0.000 0.000 0.000 1.000

Notes: Where: LnFEES � natural logarithm of audit fees; CEOGENDER � 1 if the CEO is female, else 0; BDFMPCT �percentage of female board members; BDFEMALE � 1 if at least 1 director is female, else 0; LnASSETS � natural logarithmof total assets; REINTA � percentage of total assets in receivables and inventories; SQSEG � square root of the number ofbusiness segments reported on Compustat; FORN � 1 if foreign segments reported, else 0; ROA � return-on-assets; GC � 1if the firm received a going concern audit report, else 0; MW � 1 if there is a material weakness in internal controls, else 0;RESTATE � 1 if there is a restatement in the current or prior year, else 0; CHAIR � 1 if the CEO is the chairman of the boardof directors; ACEXPCT � percentage of audit committee members that are financial experts; ACFMPCT � percentage ofaudit committee members that are female; BDSIZE � number of board members; BDINDPCT � percentage of independentboard members; BIG4 � 1 if the firm is audited by a big 4 auditor, else 0; SPEC � 1 if the firm is audited by an industryspecialist auditor, else 0; ABSDACC � absolute discretionary accruals; FIRMAGE � the number of years the firm has dataon Compustat; SG � year-to year percentage change in sales; MEETING � the number of board meetings; OUTDIR �average number of outside directorships; CFOGENDER � 1 if the CFO is female, else 0

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also chairman of the board of directors and have female CFOs. Of the reduced samplewith available CFO gender data (5,718 observations), 8.2 per cent of firms with maleCEOs (5,567 observations) have female CFOs[5].

Regression resultsTable V reports the regression results for the model used to examine the associationbetween CEO gender and audit fees. The model is significant (F-statistic � 785.78,p � 0.001). The adjusted R2 for the model is 75.64 per cent. Our variable of interestCEOGENDER is significant and positive at p � 0.014 (two-tailed). The significantly

Table V.Regression results of audit

fees on CEO gender

LnFEES � � � �1CEOGENDER � �2BDFEMALE � �3LnASSETS � �4REINTA

� �5SQSEG � �6FORN � �7ROA � �8GC � �9MW � �10RESTATE

� �11CHAIR � �12ACEXPCT � �13ACFMPCT � �14BDSIZE � �15BDINDPCT

� �16BIG4 � �17SPEC � �18ABSDACC�Year_D � Industry_D � �

Model Predicted LnFEESVariable Significance Coefficient p-value

INTERCEPT � 2.237 � 0.001CEOGENDER � 0.086 0.014BDFEMALE � 0.040 0.007LnASSETS � 0.522 � 0.001REINTA � 0.900 � 0.001SQSEG � 0.014 � 0.001FORN � 0.338 � 0.001ROA � �0.574 � 0.001GC � 0.112 0.287MW � 0.492 � 0.001RESTATE � �0.015 0.284CHAIR � 0.067 � 0.001ACEXPCT � 0.101 � 0.001ACFMPCT � 0.036 0.395BDSIZE � 0.019 � 0.001BDINDPCT � 0.595 � 0.001BIG4 � 0.055 0.039SPEC � 0.018 0.139ABSDACC � �0.055 0.730

Cluster Firm-yearYear ControlledIndustry ControlledModel F 785.78***Adjusted R2 75.64 per centN 8,402

Notes: The bold values indicate the significance of the coefficients on the explanatory variables ofinterest; * , ** and *** indicate significance at, p � 0.1, p � 0.05 and p � 0.01 level respectively(two-tailed). All variables are as defined in Table III

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positive coefficient indicates that firms with female CEOs are associated with higheraudit fees than firms with male CEOs. The coefficient on CEOGENDER (0.086)suggests that firms with female CEOs pay 8.9 per cent higher audit fees than firmswith male CEOs, which is economically significant. This is consistent with thenotion that firms with female CEOs demand higher quality audits than firms withmale CEOs.

Consistent with prior studies, the coefficients of the control variables BDFEMALE,LnASSETS, REINTA, SQSEG, FORN, ROA, MW, CHAIR, ACEXPCT, BDSIZE,BDINDPCT and BIG4 are significant and in the predicted directions. The coefficients onthe variables GC, RESTATE, ACFMPCT, SPEC and ABSDACC are insignificant atconventional levels.

Sensitivity tests and additional analysesTo check the robustness of our results, we perform several additional analyses.

Self-selection biasIt is possible that females may only become CEOs of “good” companies to minimizetheir risk of loss of reputation or to avoid legal liabilities. One characteristic of“good” companies may be that they have a propensity to purchase high qualityaudits or demand additional assurance leading to higher audit fees. This could leadto selection-bias problems in our analyses. We control for self-selection bias byusing the two-stage Heckman (1979) procedure. Consistent with prior studies Gulet al. (2008), we first estimate the following probit regression model to predict thepresence of female CEOs:

Pr[CEOGENDER � 1] � � � �1ROA � �2LnASSETST

� �3FIRMAGE � �4SG � �5 BDINDPCT

� �6 MEETING � �7 OUTDIR � Year_D

� Industry_D � �

(2)

WhereCEOGENDER � 1 if the CEO is female, else 0.ROA � return on assets.LnASSETS � natural logarithm of total assets.FIRMAGE � the number of years the firm has data on Compustat.SG � year-to-year percentage change in sales.BDINDPCT � percentage of independent board members.MEETING � the number of board meetings.OUTDIR � average number of outside directorships[6].Year_D � year dummy variables for the fiscal years 2004 through 2010.Industry_D � industry dummy variables based on Fama and French 12; and

industry classification.

Table VI reports the results of the first-stage probit model used to predict the presenceof a female CEO. The model is significant (Chi-Square � 104.00, p � 0.001). The pseudoR2 for the model is 5.49 per cent[7]. LnASSETS is significant and negative indicatingthat smaller firms are more likely to have female CEOs. FIRMAGE is significant and

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positive indicating that older firms are more likely to have female CEOs. OUTDIR issignificantly positive, suggesting that directors with more outside directorships areassociated with higher likelihood of female CEOs. ROA, SG, BDINDPCT and MEETINGare all insignificant at conventional levels.

We next use the coefficients of Equation (2) to compute the inverse Mills ratio(MILL_CEO) which we include as additional control variables in the second-stage auditfees model. Table VII reports the second-stage results including the inverse Mills ratioas an additional control variable. The results are consistent with the results in Table Vindicating a significant positive association between CEO gender and audit fees. Again,the coefficient on CEOGENDER (0.076) indicates that firms with female CEOs pay 7.9per cent higher audit fees than firms with male CEOs. Our findings are thus robust topotential self-selection bias problems.

Female CFOWe also investigate the association between CFO gender and audit fees for severalreasons. First, similar to the CEO, the CFO is involved in the selection of audit committeemembers and, therefore, is in a position to influence the audit committee. Second,Krishnan et al. (2011) also note that there may be social ties between board members andthe CFO which could negatively impact the committee’s independence Third, Cohenet al. (2013) also report that CFOs are influential in the hiring and firing of auditors.Fourth, SOX requires both the CEO and the CFO to certify their firm’s financialstatements. Fifth, prior research suggests an association between CFO characteristicsand financial reporting quality. Barua et al. (2010) report a positive association betweenCFO gender and financial reporting quality. Using a sample of 1,559 (1,222) firms in 2005(2004), they find that firms with female CFOs report lower performance-matchedABSDACCs and lower absolute accruals estimation errors. Jiang et al. (2010) also reportthat CFOs are more influential than CEOs in the financial reporting process. Excludingfirms without CFO gender information reduces our sample size to 5,718 firm-year

Table VI.Probit model for CEO

gender: control for self-selection (first stage)

Dependent Predicted CEOGENDERVariable Significance Coefficient p-value

INTERCEPT � �0.733 0.157ROA � �0.473 0.107LnASSETS � �0.081 0.001FIRMAGE � 0.002 0.030SG � �0.004 0.928BDINDPCT � 0.211 0.568MEETING � 0.008 0.478OUTDIR � 0.165 0.003Year ControlledIndustry ControlledChi Square 104.00***Pseudo R2 5.49 per centN 8,402

Notes: * , ** and *** indicate significance at, p � 0.1, p � 0.05 and p � 0.01 level respectively(two-tailed). All variables are as defined in Table III

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observations. 167 of our sample firms have female CFOs (457 observations)[8]. Wereplicate both stages of our regression model by replacing CEOGENDER with anindicator variable (EXEGENDER � 1 if either the CEO or the CFO is female, and 0otherwise). We also use an indicator variable (CFOGENDER) set equal to 1, if the CFO isfemale and 0 otherwise. We estimate the audit fees model by including EXEGENDER orCFOGENDER as well as CEOGENDER, and the results are reported in Table VIII. Wefind that audit fees are higher when either the CEO or the CFO is female. Specifically,

Table VII.Regression results of auditfees on CEO gender:control for self-selection(second stage)

LnFEES � � � �1CEOGENDER � �2BDFEMALE � �3LnASSETS � �4REINTA

� �5SQSEG � �6FORN � �7ROA � �8GC � �9MW � �10RESTATE

� �11CHAIR � �12ACEXPCT � �13ACFMPCT � �14BDSIZE

� �15BDINDPCT � �16BIG4 � �17SPEC � �18ABSDACC � �19MILL_CEO

� Year_D � Industry_D � �

Model Predicted LnFEESVariable Significance Coefficient p-value

INTERCEPT � 2.834 � 0.001CEOGENDER � 0.076 0.028BDFEMALE � 0.038 0.009LnASSETS � 0.541 � 0.001REINTA � 0.887 � 0.001SQSEG � 0.014 � 0.001FORN � 0.331 � 0.001ROA � �0.431 � 0.001GC � 0.120 0.254MW � 0.498 � 0.001RESTATE � �0.016 0.244CHAIR � 0.062 � 0.001ACEXPCT � 0.097 � 0.001ACFMPCT � 0.030 0.474BDSIZE � 0.017 � 0.001BDINDPCT � 0.447 � 0.001BIG4 � 0.053 0.043SPEC � 0.018 0.139ABSDACC � �0.022 0.891MILL_CEO � �0.351 � 0.001Cluster Firm-YearYear ControlledIndustry ControlledModel F 774.91***Adjusted R2 75.75 per centN 8,402

Notes: The bold values indicate the significance of the coefficients on the explanatory variables ofinterest; * , ** and *** indicate significance at, p � 0.1, p � 0.05 and p � 0.01 level respectively(two-tailed). MILL_CEO is inverse Mill’s ratio derived from Table VI. All variables are as definedin Table III

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the coefficient on EXEGENDER (0.040) is significantly positive and suggests 4.1 percent higher audit fees for firms with female CEOs or CFOs. We continue to find thatfemale CEOs are associated with higher audit fees. In particular, the coefficient onCEOGENDER (0.067) is significant and positive and suggests that firms with female CEOspay 6.9 per cent higher audit fees than firms with male CEOs. Moreover, we find marginallysignificant and positive association between female CFOs and audit fees (p � 0.10,

Table VIII.Regression results of audit

fees on CEO and CFOgender: control for self-selection (second stage)

LnFEES � � � �1CEOGENDER � �2CFOGENDER � �3BDFEMALE

� �4LnASSETS � �5REINTA � �6SQSEG � �7FORN � �8ROA � �9GC

� �10MW � �11RESTATE � �12CHAIR � �13ACEXPCT � �14ACFMPCT

� �15BDSIZE � �16BDINDPCT � �17BIG4 � �18SPEC � �19ABSDACC

� �20MILL_CEO � �21MILL_CFO � Year_D � Industry_D � �

Model Predicted LnFEES LnFEESVariable Significance Coefficient p-value Coefficient p-value

INTERCEPT � 3.917 � 0.001 3.907 � 0.001EXEGENDER � 0.040 0.055CEOGENDER � 0.067 0.091CFOGENDER � 0.031 0.190BDFEMALE � 0.058 0.001 0.058 0.001LnASSETS � 0.524 � 0.001 0.524 � 0.001REINTA � 0.861 � 0.001 0.862 � 0.001SQSEG � 0.016 � 0.001 0.016 � 0.001FORN � 0.346 � 0.001 0.347 � 0.001ROA � �0.519 � 0.001 �0.518 � 0.001GC � 0.208 0.106 0.207 0.108MW � 0.429 � 0.001 0.430 � 0.001RESTATE � 0.005 0.755 0.005 0.751CHAIR � 0.043 0.009 0.043 0.009ACEXPCT � 0.084 � 0.001 0.083 � 0.001ACFMPCT � �0.072 0.166 �0.071 0.170BDSIZE � 0.016 � 0.001 0.016 � 0.001BDINDPCT � 0.346 0.019 0.348 0.018BIG4 � 0.047 0.086 0.048 0.086SPEC � 0.023 0.098 0.022 0.103ABSDACC � �0.232 0.200 �0.232 0.199MILL_CEO � �0.353 0.029 �0.349 0.031MILL_CFO � �0.349 0.175 �0.348 0.175Year Controlled ControlledIndustry Controlled ControlledModel F 540.81*** 526.98***Adjusted R2 77.02 per cent 77.02 per centN 5,718 5,718

Notes: The bold values indicate the significance of the coefficients on the explanatory variables ofinterest; * , ** and *** indicate significance at, p � 0.1, p � 0.05 and p � 0.01 level respectively(two-tailed). MILL_CEO and MILL_CFO are inverse Mill’s ratios. All variables are as defined in Table III

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one-tailed). The coefficient on CFOGENDER (0.031) indicates that firms with female CFOspay 3.1 per cent higher audit fees than firms with male CFOs.

A possible explanation for the weak association between CFO gender and audit feesis that the CFO works closely with the auditor engagement and the financial statements.On the one hand, female CFOs would be more conservative and demand more auditefforts, which would increase audit fees. On the other hand, the CFO has the primaryresponsibility for the preparation of the financial statements. Extant literature suggeststhat female CFOs are more conservative and associated with higher quality earnings(Barua et al., 2010; Peni and Vahamaa, 2010) which would reduce the auditor’sassessment of the firm’s inherent risk leading to lower audit fees thus mitigating theeffect of the higher audit demands of firms with female CFOs. Therefore, the associationbetween CFO gender and audit fees is weakened, because the two confounding effectsmay reduce the effect of CFO gender.

Other sensitivity testsTo ensure that our results are not driven by auditor quality, we partition our sampleinto two groups based on whether the firm is audited by big 4 auditors or non-big 4auditors and re-estimate our regression models. Our results remain qualitativelyunchanged. We also partition the sample based on whether the firm is audited by anindustry specialist auditor and re-estimated our regressions. Our results remainqualitatively unchanged.

Next, we partition our sample into two groups based on total assets (above and belowthe median) and estimate separate regressions for the two groups. Our results remainunchanged for the group above the median but the CEOGENDER variable becameinsignificant for the below median group indicating that the association between CEOgender and audit fees is stronger for larger firms. A possible explanation for theinsignificant results is that smaller firms have lower visibility than larger firms andare less likely to be sued. The demand for higher quality audits by these firms ismore likely to be mitigated by the auditor lowering the assessment of the inherentrisk of the firm having a female CEO. This view is supported by Reynolds andFrancis (2001), who find that Big 5 auditors report more conservatively for largerclients. They suggest that larger clients pose a greater litigation risk to auditors.They argue that if a questionable audit is performed for a large high-profile client,the audit firm is likely to suffer a greater loss of reputation and higher litigationcosts than it would for a smaller less visible client.

We estimate our regression model including a control for the percentage ofoutstanding shares owned by the CEO because Mitra et al. (2007) report a negativeassociation between the percentage of outstanding shares owned by the CEO and auditfees. Contrary to Mitra et al. (2007), we find a significantly positive association betweenthe percentage of outstanding shares owned by the CEO, and audit fees and our testvariable remain significantly positive.

We also estimate our regression model including controls for non-audit fees, firmleverage, audit committee size and a dummy variable set equal to one if the firm reporteda loss and zero otherwise as a measure of firm profitability. Our results remainqualitatively unchanged.

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Summary and conclusionsIn this study, we investigate the association between corporate executive’s gender andaudit fees. Specifically, we examine the association between CEO gender and audit feesSOX requires audit committees to be independent of management. Prior research,however, suggests that even though audit committees may meet regulatoryrequirements of independence, it is still possible for them to be influenced bymanagement. The CEO could possibly influence the audit committee in the choice ofaudit quality. Prior research also suggests that females are more cautious and riskaverse than males. A more cautious and risk-averse CEO may require a higher qualityaudit to protect his/her reputation and guard against future losses from lawsuits[9]. Ahigher quality audit leads to higher audit fees. On the other hand, auditors may viewfirms with a more conservative CEO as less risky and, therefore, reduce the scope of theaudit leading to lower audit fees. We, therefore, do not predict the direction of theassociation between CEO gender and audit fees. Because prior research reports anassociation between CFO gender and the financial reporting process, we also examinethe association between CFO gender and audit fees.

Using a sample of 8,402 Compustat firm-years for 2003-2010, we find a significantlypositive association between CEO gender and audit fees. Our results suggest that firmswith female CEOs are associated with higher audit fees. This is consistent with thenotion that firms with female CEOs demand higher quality audits resulting in higheraudit fees. We also find a marginally significant and positive association betweenfemale CFOs and audit fees. Our study, therefore, extends the corporate governance,gender diversity and audit fees literature by identifying CEO gender as a determinant ofaudit fees. Additionally, our study has implications for policy setting because ourfindings provide some evidence of a significant association between a CEOcharacteristic (gender) and financial reporting quality. Our findings thus provide somesupport for the SEC requirement that CEOs should certify their firm’s financialstatements. Our study is subject to several limitations. First, although we control forselection bias by using the Heckman (1979) procedure, our results should be interpretedwith caution because, as noted by Lennox et al. (2012) and Larcker and Rusticus (2010),selection models are limited and can yield widely varying outcomes in response to fairlyminor changes in model specification. Second, although we control for other factors thatprior studies suggest are associated with audit fees, our results may be due to correlatedomitted variables. Third, because our sample is from large publicly traded nonfinancialfirms, our results may not be applicable to other types of firms. Fourth, our sampleperiod is 2003-2010, and thus our results may not be generalized to other periods.Finally, even though we control for factors that would increase audit fees, our study islimited by the degree to which higher audit fees reflect higher quality audits.

Notes1. CEO duality exists if the CEO is also the chairman of the board of directors.

2. See also Gul et al. (2008).

3. We also estimate our regression models using the percentage of females on the board ofdirectors as a measure of female representation on the board with qualitatively the sameresults.

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4. The SEC’s definition of a financial expert has been controversial. Initially, financial expertisewas limited to accounting-related expertise, but after much criticism, it was later broadened toinclude non-accounting financial expertise (DeFond et al., 2005; Dhaliwal et al., 2010).

5. We exclude five firms (17 observations) with both female CEO and female CFO to accuratelyobserve the individual effect of CEOGENDER and CFOGENDER. We find insignificant differencein the presence with female CFOs between firms with male CEOs and firms with female CEOs,when we include firms with both female CEO and female CFO (p � 0.10, two-tailed).

6. Missing data are set to 0. Our results are qualitatively the same with the inclusion or exclusionof this variable.

7. This is a low R2 compared to Gul et al. (2008). The low R2 could be partly due to the fact thatwe adopted a model that was originally used to predict females on the board of directors, notfemale CEOs.

8. To accurately observe the individual effect of CEOGENDER and CFOGENDER, we excludefive firms (17 observations) with both female CEO and CFO. The results including theseobservations are similar. We continue to find that female CEOs are associated with higheraudit fees (p � 0.10, one-tailed). The coefficient on CFOGENDER is still positive (p � 0.15,one-tailed).

9. Our paper examines the association between CEO gender and audit fees. To investigate acausal relationship, we examine whether changes in CEO gender are accompanied by changesin audit fees. In our sample, 15 firms changed female CEOs for male CEOs and 35 firmschanged male CEO for female CEOs. We find no significant association between changes inCEO gender and changes in audit fees. A possible explanation for the lack of statisticalsignificance is the paucity of observations meeting the change requirement.

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About the authorsTing-Chiao Huang is a PhD Student of Accounting. Ting-Chiao Huang is the correspondingauthor and can be contacted at: littlejoey1026@hotmail.com

Hua-Wei Huang is an Associate Professor of Accounting.Chih-Chen Lee is an Associate Professor of Accounting.

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