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Managerial Auditing JournalThe impact of demographic characteristics of CEOs and directors on audit feesand audit delayMaretno Agus Harjoto Indrarini Laksmana Robert Lee
Article information:To cite this document:Maretno Agus Harjoto Indrarini Laksmana Robert Lee , (2015),"The impact of demographiccharacteristics of CEOs and directors on audit fees and audit delay", Managerial Auditing Journal,Vol. 30 Iss 8/9 pp. 963 - 997Permanent link to this document:http://dx.doi.org/10.1108/MAJ-01-2015-1147
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The impact of demographiccharacteristics of CEOs anddirectors on audit fees and
audit delayMaretno Agus Harjoto
Graziadio School of Business and Management, Pepperdine University,Malibu, California, USA
Indrarini LaksmanaCollege of Business Administration, Kent State University, Kent,
Ohio, USA, and
Robert LeeGraziadio School of Business and Management, Pepperdine University,
Malibu, California, USA
AbstractPurpose – The purpose of this study is to examine the impact of gender and ethnicity of CEO and auditcommittee members (directors) on audit fees and audit delay in the US firms.Design/methodology/approach – Audit-related corporate governance literature has extensivelyexamined the determinants of audit fees and audit delay by focusing on board characteristics,specifically board independence, diligence and expertise. The authors provide empirical evidence thatgender and ethnicity diversity in corporate leadership and boardrooms influence a firm’s audit fees andaudit delay.Findings – This study finds that firms with female and ethnic minority CEOs pay significantly higheraudit fees than those with male Caucasian CEOs. The authors also find that firms with a higherpercentage of ethnic minority directors on their audit committee pay significantly higher audit fees.Further, the authors find that firms with female CEOs have shorter audit delay than firms with maleCEOs and firms with a higher percentage of female and ethnic minority directors on their auditcommittee are associated with shorter audit delay. Results indicate that female CEOs and both femaleand ethnic minority directors are sensitive to the market pressure to avoid audit delay.Research limitations/implications – The results suggest that gender and ethnic diversity couldimprove audit quality and the firms’ overall financial reporting quality.Practical implications – This study provides insights to regulators and policy-makers interested inincreasing diversity within a firm’s board and top executives. Recently, the US Securities and ExchangeCommission (SEC) and the European Commission have been pressing publicly traded companies toimprove diversity among their directors. This study provides evidence and perspective on howdiversity can enhance financial reporting quality measured by audit fees and audit delay.
The authors are grateful for the helpful comments and suggestions of two anonymous referees.Harjoto acknowledges Julian Virtue Professorship endowment and Rothschild awards forfinancial support and release time for this research. Lee acknowledges Julian Virtue Professorshipendowment for financial support and release time for this research.
The current issue and full text archive of this journal is available on Emerald Insight at:www.emeraldinsight.com/0268-6902.htm
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Managerial Auditing JournalVol. 30 No. 8/9, 2015
pp. 963-997© Emerald Group Publishing Limited
0268-6902DOI 10.1108/MAJ-01-2015-1147
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Originality/value – Previous studies have not given much attention on the impact of racial ethnicityin addition to gender characteristics of top executives and audit committee directors on audit fees andaudit delay.
Keywords Gender, CEO, Audit delay, Ethnicity, Audit committee, Audit fees
Paper type Research paper
1. IntroductionThis paper investigates how the demographic characteristics of CEOs and auditcommittee members affect the level of audit services and the timeliness of auditreporting. Specifically, we examine whether the gender and ethnicity of theseindividuals are important determinants of audit fees and audit delay. Prior studies useaudit fees as a proxy for audit efficiency (Raghunandan and Rama, 2006; Masli et al.,2010) and audit quality (Carcello et al., 2002; Abbott et al., 2003) and use audit delay asa proxy for timely audit reporting (Ettredge et al., 2006; Masli et al., 2010). Theimportance of audit fees and audit delay is well established, and this study examineshow the gender and ethnicity of top management and audit committee (board) membersinfluence these audit outcomes.
The motivation for this study comes from three sources. First, individual differencesdue to both gender and ethnicity are likely to influence decision-making. In our setting,executives and directors make decisions that will influence the quality, efficiency andtimeliness of financial reporting. Recent studies in corporate finance, accounting andcorporate governance have documented differences between men and women inmanagerial and board decision-making. These studies suggest that female topexecutives and directors are more risk averse and less likely to be overconfident in theirdecision-making; moreover, they are more diligent and have preference for a higher levelof monitoring intensity than their male counterparts (Huang and Kisgen, 2012; Faccioet al., 2012; Barua et al., 2010; Adams and Ferreira, 2009; Gul et al., 2011; Abbott et al.,2012).
Our study is the first that investigates the associations between the ethnicity of CEOsand directors and both audit fees and audit delay. Gender and ethnic minorities havebeen significantly underrepresented in corporate leadership roles. Social discriminationhas been cited as one of the reasons (Finkelstein et al., 2009). The stream of research onsocial discrimination has suggested that racial minority individuals generally need ahigher degree of education and work experience to obtain a leadership role (Bilimoriaand Piderit, 1994; Hillman et al., 2002). Park and Westphal (2013) find that socialdiscrimination continues even after these individuals obtain leadership positions. Theyfind that racial minority CEOs are more likely to receive blame for low firm performancethan white CEOs. Like female executives, ethnic minority executives face the same labormarket challenges, such as the wage gap and glass ceiling (Alon and Haberfeld, 2007)and the scrutiny from the labor market (Park and Westphal, 2013).
Alhough there are only a few existing studies examining the effect of ethnic diversityon management and board decision-making, prior studies have documented that ethnicminorities share the same risk perception as women (Flynn et al., 1994; Finucane et al.,2000). Both females and individuals of racial minority face social inequality andchallenges and, thus, have a stronger external pressure to succeed in their roles (Cheng,1997; Kennedy and Schumacher, 2005), resulting in their being more risk averse thanwhite males. With greater social pressure to maintain their leadership roles, racial
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minority and female CEOs and directors are more likely to have a preference for greaterassurance (i.e. reliability of financial reporting) and more timely audit reporting (i.e.timeliness of audit reports and earnings).
Second, existing studies examining determinants of audit fees and audit delay havefocused on firm-level characteristics and board characteristics, particularlyindependence, diligence and expertise (Raghunandan and Rama, 2006; Ettredge et al.,2006; Masli et al., 2010; Carcello et al., 2002; Abbott et al., 2003). These studies, however,have not given much attention on the demographic characteristics of top executives anddirectors (audit committee members).
To the best of our knowledge, there are three studies that are closely related to ourstudy. Two existing studies investigate the relation between director gender and auditfees and show conflicting and inconclusive results (Gul et al., 2008 and Ittonen et al.,2010)[1]. Our study attempts to explain these conflicting results. The third study (Huanget al., 2014) examines the association between CEO gender and audit fees. Our studyadds to Huang et al. (2014) by examining not only audit fees, but also audit delay andtheir associations with both gender and ethnicity of CEO and directors.
Finally, with respect to corporate boards, the US Securities and ExchangeCommission (SEC) in recent years has encouraged firms to improve board diversity[2].On December 16, 2009, the SEC adopted a new set of rules requiring publicly tradedcompanies to disclose whether and how board diversity is considered in the selectionprocess of director nominees (SEC Release 33-9089 issued on December 16, 2009). In asimilar spirit, in November 2013, the European Parliament issued a proposal forimproving the gender balance among non-executive directors of companies listed onstock exchanges by voting in favor of a draft law requiring a 40 per cent quota for femaledirectors. While these rules recognize the importance of board diversity, theeffectiveness of these diversely comprised boards in overseeing the financial reportingprocess is an empirical question. Our study examines the practical implications ofwhether gender and ethnic diversity in boardrooms adds value to board oversight of thefinancial reporting process, as reflected in audit fees and audit delay.
We present two competing audit fee hypotheses based on the supply and demandside of audit pricing. Risk-averse individuals (i.e. female and ethnic minority CEOs anddirectors) are likely to be more sensitive to the capital and labor market pressure tomaintain high-quality reporting. On one hand, female and ethnic minority CEOs anddirectors could have preferences for strong internal control systems to maintainacceptable levels of reporting risk[3]. From the auditors’ perspective (i.e. the supplyside), a strong internal control environment will decrease control risk and, in turn, loweraudit fees, suggesting a negative relation between female and ethnic minority CEO anddirectors and audit fees. On the other hand, risk-averse CEOs and directors could alsorespond to the pressure to maintain high-quality reporting by demanding greaterassurance (e.g. by requesting additional tests or more experienced auditors) above andbeyond the auditors’ optimal level. Consistent with the demand-side argument, higherdemand for assurance would result in higher audit fees, suggesting a positive relationbetween audit fees and female and ethnic minority CEO and directors.
Using the data of the US publicly traded firms between 2000 and 2010, we find thatfirms with female and ethnic minority CEOs pay significantly higher audit fees than thefirms of their Caucasian male counterparts. We also document that the percentage ofethnic minority directors on audit committees are positively associated with audit fees.
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Both results provide support for the demand side of audit pricing. We do not findevidence that the presence of female audit committee members is associated with auditfees. However, we do find that audit committees with female chairs are associated withlower audit fees, consistent with the supply-side argument.
Due to their risk preference, we hypothesize that female and ethnic minority CEOsare more likely to avoid audit delay, as the delay reduces the timeliness of auditedfinancial statements and could signal problems with internal control systems and/orother financial reporting issues (Ettredge et al., 2006; Knechel and Payne, 2001). We findevidence that female CEOs are associated with shorter audit report delay, suggestingthat they are sensitive to the market pressure to avoid audit delay. However, we find thatCEO ethnicity is not associated with audit delay.
We present two competing hypotheses with respect to gender (ethnicity) of auditcommittee members and audit delay. On one hand, directors who require a higher degreeof assurance are less likely to be concerned with the pressure to avoid reporting delaythan with the pressure to protect their own reputation as good monitors. Compared toCEOs, audit committee members are arguably less sensitive to the capital marketpressure to avoid audit delay because directors receive a relatively smaller portion oftheir total compensation from serving on one corporate board. Because female (ethnicminority) directors are more likely to demand additional assurance, the presence of thesedirectors will be positively associated with audit delay. However, if these female(minority) directors who demand for greater assurance are also sensitive to the pressureto avoid audit delay (e.g. using more efficient audit procedures) because they have socialpressure to maintain their board roles, then the presence of such directors will benegatively associated with audit delay. Our results show supporting evidence to thelatter argument that audit committees with greater proportion of female and ethnicminority members are associated with shorter audit delay.
Our study contributes to the stream of research on audit fees, audit delay andcorporate governance, by showing that individual characteristics of CEOs and directors,specifically gender and ethnicity, are important determinants of audit fees and auditdelay. CEOs and audit committee members are important decision-makers on financialreporting and auditing issues, but their individual differences have not been muchexamined in existing studies. Our study uses the research settings in which individualdifferences, along gender and ethnic lines manifesting in differences in tendenciestoward risk aversion, diligence and preference for monitoring intensity, are likely toaffect financial reporting decisions.
We contribute to a growing line of research examining the role of diversity incorporate leadership and boardrooms. In addition to gender, we examine ethnicity, asprior studies have shown that ethnic minorities exhibit the same risk perception aswomen. Because the impact of ethnic diversity on managerial and boarddecision-making has not been much explored, it provides an interesting researchopportunity. We complement other studies (Abbott et al., 2012) documenting thepositive impact of gender-diverse boards on board decisions on financial reportingissues. Our study shows that both gender diversity and ethnic diversity add value toboard oversight of management; we document that ethnic diversity in audit committeesis associated with greater demand for audit services (measured by audit fees) and thatboth gender and ethnic diversity are associated with timely audit reporting (measuredby audit delay). We also complement other studies documenting the positive impact of
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female leadership on financial reporting issues (Barua et al., 2010). Our results suggestthat both female and ethnic minority CEOs demand greater assurance and are willing topay for higher audit fees than male Caucasian CEOs and that female CEOs are morelikely to avoid audit report delay than male CEOs.
Our study also extends prior research examining director and CEO gender, as itrelates to audit fees (Gul et al., 2008; Ittonen et al., 2010; Huang et al., 2014). Our studyexamines characteristics of both directors (audit committee members) and CEOs, aseach group serves important and different roles in the audit process. Finally, weexamine both audit fees and audit delay, as prior studies have documented that thesevariables are important measures of financial reporting quality and are correlated. As aproxy for audit quality or audit effectiveness, audit fees relate to the reliability of thefinancial reporting process and the audited financial statements. Audit delay measuresthe timeliness of audited financial statements and reported earnings[4].
The remainder of this paper is organized as follows. Section 2 summarizes relevantstudies and discusses the development of the hypotheses. Section 3 describes ourresearch methodology, followed by a discussion of our empirical findings androbustness tests. Finally, Section 4 summarizes our findings, provides conclusions andimplications and discusses limitations.
2. Literature review and hypotheses2.1 Prior studies on gender and ethnic differencesRecent studies in corporate finance and accounting have begun to examine the role ofgender on managerial and board decisions. The existing literature shows that thedifferences between male and female executives and directors in their decision-makingprocess could be explained by the differences in, among other things, their level ofoverconfidence, risk tolerance, diligence and monitoring intensity (Huang and Kisgen,2012; Faccio et al., 2012; Adams and Ferreira, 2009; Gul et al., 2011; Ittonen et al., 2010,2013; Abbott et al., 2012).
Huang and Kisgen (2012) document that female CEOs are less likely to beoverconfident in their decision-making than male CEOs; the former provide a widerrange of earnings forecasts, are more likely to exercise their in-the-money stock optionsearlier and are less likely to conduct value-destroying acquisitions. Faccio et al. (2012)discover that firms with female CEOs tend to make less risky choices and, as a result,have lower leverage, less volatile earnings and higher chance of survival than those withmale CEOs.
Examining the role of gender on corporate boards, a number of studies suggest thatfemale directors can help improve corporate governance. Adams and Ferreira (2009)find that female directors have better attendance records and are more involved withcommittees that require intense monitoring (e.g. audit, nominating and corporategovernance committees) than male directors. Gul et al. (2011) find that corporate boardswith more female directors are associated with greater stock price informativenesswhen corporate governance is weak, suggesting that gender-diverse boards act assubstitutes for more effective corporate governance. In addition, studies have found thatfemales have helped improve the overall financial reporting quality by their monitoringintensity. Abbott et al. (2012), for example, document that the presence of female boardmembers is associated with a lower likelihood of financial restatement.
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As for the role of ethnic diversity in management and board decision-making, thisarea has not been much examined. Prior research in health, psychology, sociology andrisk analysis literature has found that minorities share the same risk perception aswomen (Flynn et al., 1994; Finucane et al., 2000). These studies argue that both femalesand individuals of racial minority face social inequality, resulting in their adoption of ahigher risk perception (i.e. more risk averse) than white males[5]. In addition, ethnicminorities and females have been found to have different extrinsic work values thanwhite males (Ng and Sears, 2010). Ng and Sears (2010) find that extrinsic work values,such as the importance of salary level, benefits and job security, were reported higher byethnic minorities and women. Because ethnic minorities and women are more concernedabout job security than white men, these under-represented groups of individuals willhave a greater incentive and pressure to succeed and to maintain their leadershippositions.
The literature on ethnic diversity does include some theories which predict positiveoutcomes of ethnic diversity on group performance (Cox et al., 1991; Cox, 1993). Thesetheories assume that individuals from different ethnic backgrounds have differentknowledge bases, different sets of experiences and different perspectives on society.Therefore, an increase in ethnic diversity would result in:
[…] positive outcomes such as increased information, enhanced problem solving ability,constructive conflict and debate, increased creativity, higher quality decision, and increasedunderstanding of different ethnicity or cultures (Shore et al., 2009)[6].
2.2 Audit fee hypothesis developmentThe stream of literature on determinants of audit fees was pioneered by the seminalpaper of Simunic (1980). Hay et al. (2006) conducted a meta-analysis of the audit feeliterature and classified determinants of audit fees into three categories: firm (client),auditor and engagement attributes. Earlier audit fee studies focused on these firm-levelcharacteristics. With the heightened public interest in corporate governance followingthe outbreak of accounting scandals, more recent studies have begun examining boardand audit committee characteristics (i.e. independence, diligence and expertise) asdeterminants of audit fees (Carcello et al., 2002; Abbott et al., 2003; Goodwin-Stewart andKent, 2006). Existing research, however, has not given much attention to individualcharacteristics of top executives and directors (audit committee members) that influencethe level of these audit services.
Within this stream of literature, prior studies on audit fees present two viewson audit pricing. One stream of studies views audit fees from the supply side, linkingaudit fees and auditor risk. Based on the supply-side perspective, audit fees are seenas a proxy for audit efficiency (Raghunandan and Rama, 2006; Masli et al., 2010).Audit fees result from a production function in which a strong control environmentwill decrease the external auditor’s assessed level of control risk, reducing the needfor external audit services and lowering audit fees (Simunic, 1980). However, thistheoretical model assumes a constant demand for audit and ignores the differentdemand forces driving the level of audit fees.
The other stream of research views audit pricing from the demand side. Thedemand for auditing is a function of a set of risks faced by various stakeholders withinterests in the outcome of the audit (Hay et al., 2006). When multiple stakeholders
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become involved in corporate governance decisions, the total demand for externalaudit, and thereby audit fees, will increase because those with authority for settingthe level of assurance (e.g. management and audit committee) need to protect theirown interests (Knechel and Willekens, 2006). For example, while audit committeemembers generally have concerns about the quality of the financial reportingprocess, a risk-averse committee member may also have concerns for his or herpersonal loss, such as legal and reputational costs, arising from potentiallyfraudulent management activities. As a result, the audit committee member maypress for greater assurance than is necessary to reduce the reporting risk to anacceptable level for all shareholders, shifting the additional cost of audit toshareholders, who have little power in determining the level of audit work (Carcelloet al., 2002). Based on the demand-side argument, audit fees are seen as a proxy foraudit quality (Carcello et al., 2002; Abbott et al., 2003).
Given the regulatory standards (e.g. Section 302 and 404 of the Sarbanes-Oxley Act)and the pressure from both the capital market and the executive labor market, mostCEOs desire audit quality because it relates to reporting quality, and they perceive theirreputation and personal welfare are at stake[7]. CEOs (and other executives) could losetheir jobs and face potential legal and reputational costs when issuing financial reportsand disclosure of poor quality. Prior research has shown that top executive turnover isassociated with poor reporting and disclosure quality, such as restatement (Desai et al.,2006). CEOs who are forced to turnover generally find new positions that are, onaverage, inferior to their prior jobs (Fee and Hadlock, 2004). In addition, Banker et al.(2013) find that past performance affects the salary of continuing and newly appointedCEOs, providing evidence that reputation matters in determining executivecompensation. With job security and compensation being influenced by financialreporting quality, CEOs will naturally desire to provide high-quality reports anddisclosure[8].
Our study first examines whether CEO’s demographic characteristics, specificallygender and race or ethnicity, affect audit fees. Following the demand and supply-sidearguments of audit pricing, we present two competing hypotheses. Because CEOs arestrongly influential in determining the level of audit assurance and risk-averse CEOsare more sensitive to the pressure to protect their reputational capital, we argue thatfemale (ethnic minority) CEOs will demand more audit services than male CaucasianCEOs. This view is consistent with Cao et al. (2012), documenting that more reputablefirms have higher audit fees because these firms are willing to pay for more auditservices to protect their reputation. Thus, the presence of female and minority CEOs isassociated with greater assurance (i.e. more audit hours or greater proportion ofexperienced auditors), leading to higher audit fees.
On the other hand, their preference for lower risk-taking could also encourage female(ethnic minority) CEOs, as compared to male Caucasian CEOs, to respond to regulatoryand market pressures by building stronger internal control systems. The increased levelof internal controls, in turn, reduces the external auditor’s assessed control risk andlowers audit fees. Thus, the presence of female and minority CEOs can also beassociated with lower audit fees. Under both the demand and supply perspectives, therisk preference of female and minority CEOs causes them to shift costs to externalshareholders through additional audit fees or additional costs to build stronger internal
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control systems. Given the two competing hypotheses, we present the followingnon-directional hypotheses:
H1a. Ceteris paribus: CEO gender is associated with audit fees.
H1b. Ceteris paribus: CEO ethnicity is associated with audit fees.
Our second set of hypotheses relates to the gender and ethnicity of audit committeemembers and audit fees. Group dynamics in corporate boards and their committees varydepending on the background of individuals serving on them. As such, greaterrepresentation of females and ethnic minorities could influence the board (committee)decision-making process. Work group diversity literature has found both positive andnegative effects of diversity on group performance (Jackson et al., 2003; Ilgen et al., 2005;Knippenberg and Schippers, 2007). The general intuition is that group diversity createsa positive effect on group performance by introducing a wide range of knowledge andskills that fosters different perspectives. However, the negative effect of group diversityis that diverse perspectives could clash and hinder group performance and progression.In our subsequent discussion, we assume that the positive effect of group diversityoutweighs the negative effect[9].
Audit committees are responsible for overseeing the financial reporting functions,including internal control and compliance systems, internal audit functions and externalaudit functions. These committee members face reputational costs for failing to performtheir monitoring duties. Prior research has shown that directors with reputation aseffective (ineffective) monitors are rewarded (punished) with increases (decreases) in thenumber of directorships held (Gilson, 1990; Shivdasani, 1993; Harford, 2003; Farrell andWhidbee, 2000). In addition, auditor committee members experience turnover whentheir companies have accounting restatements (Srinivasan, 2005)[10].
We argue that more risk-averse committee members (i.e. women and minorities) willhave preferences for greater assurance to protect their reputations as good managers.Greater assurance could be achieved in two ways. First, audit committees couldauthorize the purchase of more audit services (i.e. more hours and/or greater proportionof experienced auditors assigned to the audit), leading to higher audit fees. This view isconsistent with the demand-side argument. Prior studies have provided evidencesupporting the demand-side argument; board (audit committee) independence, diligenceand expertise are positively associated with audit fees (Carcello et al., 2002; Abbott et al.,2003; Goodwin-Stewart and Kent, 2006; Gul et al., 2008)[11]. These studies suggest thatdirectors (committee members) with certain characteristics have greater demand foraudit services, resulting in higher audit fees. Consistent with the demand-side argument,female and minority audit committee members, due to their risk preferences, willsupport the purchase of more audit services to reduce reporting risk and protect theirreputations. Therefore, the presence of female and minority audit committee members isassociated with higher audit fees.
Second, audit committees could obtain greater assurance by exerting pressure onmanagement to build stronger internal control systems and being more involved inoverseeing the financial reporting process. This approach affects the external auditor’sassessment of the internal control environment, reducing control risk and potentiallydecreasing audit effort and audit fees. Prior studies have shown that independent auditcommittees and committees with financial experts are less likely to be associated withinternal control problems (Krishnan, 2005; Zhang et al., 2007)[12] suggesting that having
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certain types of individuals serve on audit committees could affect the internal controlenvironment. In line with the supply-side perspective, as female (minority) committeemembers have lower risk preferences, they will reduce reporting risk by being moreinvolved in the internal audit process and the oversight of internal control andcompliance systems. This view is also consistent with the empirical evidencedocumenting female directors as being more diligent and exhibiting a preference forhigher levels of monitoring intensity than male directors (Adams and Ferreira, 2009;Abbott et al., 2012), resulting in lower audit fees.
Given the competing arguments, our second set of hypotheses is non-directional:
H2a. Ceteris paribus: The proportion of female audit committee members isassociated with audit fees.
H2b. Ceteris paribus: The proportion of ethnic minority audit committee members isassociated with audit fees.
2.3 Audit delay hypothesis developmentFollowing prior studies, we define audit delay (audit report lag) as “the length of timefrom a company’s fiscal yearend to the date the auditors sign their report” (Ettredgeet al., 2006). Audit delay is a proxy for the timeliness of audit reports and, thus, thetimeliness of reported earnings. Recent research on audit delay has shown that auditdelay is positively associated with the presence of material weaknesses in internalcontrol over financial reporting (Ettredge et al., 2006). In addition, audit delay ispositively associated with the implementation of related disclosure and auditingregulations, such as Section 404 of Sarbanes-Oxley Act of 2002 (Krishnan and Yang,2009; Ettredge et al., 2006), and Public Company Accounting Oversight Board (PCAOB)Auditing Standards No. 2 on internal control and No. 3 on documentation (Bronson et al.,2011)[13].
Our third set of hypotheses examines the relationship between audit delay and CEOgender and ethnicity. Prior research on earnings announcement has long shown that thelate announcement of earnings is associated with lower abnormal returns than earlyannouncements (Givoly and Palmon, 1982; Chambers and Penman, 1984; and Kross andSchroeder, 1984). Late announcements will reduce the timeliness of earnings. Due totheir risk preference, we argue that female and ethnic minority CEOs are more likely toavoid audit delay because the delay not only reduces the timeliness of audited financialreports, but also signals problems with internal control systems and/or other financialreporting issues (Ettredge et al., 2006; Knechel and Payne, 2001). Because female andethnic minority CEOs are more sensitive to the pressures exerted by the capital andlabor markets for both reliable and timely reporting, we expect a negative relationshipbetween the presence of female (minority) CEOs and audit delay.
CEOs could avoid audit delay using one of these two strategies. First, CEOs couldbuild a strong control environment, reducing the auditor’s assessment of control riskand substantive testing. Second, CEOs could also demand that the external auditor usemore efficient audit procedures, such as assigning more experienced (managers andpartners) and specialized auditors to the audit and performing more interim audit workbefore the year-end. The negative relationship between female (minority) CEOs andaudit delay is consistent with both the supply- and demand-side arguments of auditpricing. On one hand, risk-averse CEOs who have concerns with late reporting are more
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likely to build strong internal control systems, lowering the likelihood of audit delay. Onthe other hand, risk-averse CEOs who demand greater assurance, but are sensitive to thepressure to avoid audit delay, will ask for an efficient audit. In this case, the demand forgreater assurance will not increase the likelihood of audit delay.
Our third set of hypotheses in an alternative form is as follows:
H3a. Ceteris paribus: The presence of a female CEO is negatively associated withaudit delay.
H3b. Ceteris paribus: The presence of an ethnic minority CEO is negativelyassociated with audit delay.
Audit committee members are less sensitive to the capital market pressure to avoidaudit delay because directors, compared to CEOs, receive a relatively smaller portion oftheir total compensation from serving on one corporate board. In addition, auditcommittee members are usually outside directors. Compared to internal directors,outside directors are more responsive to the pressure to protect their reputations as goodmonitors (Fama and Jensen, 1983). On the one hand, more risk-averse directors (i.e.females and minorities) will require a higher degree of assurance, but are less likely to beconcerned with the pressure to avoid reporting delay than with the pressure to protecttheir own reputation as good monitors. Demand for greater assurance could lengthenthe course of the audit when auditors need to perform additional tests (e.g. findingmaterial weaknesses in internal control systems) and to resolve audit issues withmanagement. In this case, the presence of female (minority) audit committee members ispositively associated with audit delay. On the other hand, when risk-averse directorswho demand for greater assurance are also sensitive to the market’s expectation to avoidaudit delay, such directors are likely to press auditors to use more efficient auditprocedures. In this case, the presence of such directors is negatively associated withaudit delay.
Given the two competing arguments, our fourth set of hypotheses is non-directional:
H4a. Ceteris paribus: The proportion of female audit committee members isassociated with audit delay.
H4b. Ceteris paribus: The proportion of ethnic minority audit committee membersis associated with audit delay.
3. Methodology and results3.1 Sample selection and descriptive statisticsOur sample period covers firm years between 2000 and 2010. We use audit data from theAudit Analytics database, financial data from Compustat, stock market data fromCenter for Research in Security Prices (CRSP), CEO tenure and CEO turnover data fromExecucomp and director data from RiskMetrics Investor Responsibility ResourceCenter (IRRC). The combined data set has 15,536 observations across 1,674 firms. Afterdeleting observations with missing variables, our final sample consists of 12,153observations from 1,642 firms.
Our dependent variables are LAFEE (the natural log of audit fees) and LADELAY(the natural log of number of calendar days from fiscal yearend to the date of auditreport). Table II presents that the mean and median of audit fees are $3.024 and $1.337million, respectively, indicating that the mean of audit fee data is skewed to the right.
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The mean and median of number of days of audit delay are approximately 55 and 56days, respectively. For our multivariate analyses, we used four CEO gender/ethnicitycategories and constructed three indicator variables: white women CEOs (WWCEOs),women ethnic minority CEOs (WMCEOs) and male ethnic minority CEOs (MMCEOs).Ethnic minority is defined as being Black, Hispanic or Asian. The base group is whitemale CEOs. On average, 7.2 per cent of firms in our sample have WWCEOs, 2 per centhave WMCEOs and 6 per cent of firms in our sample have MMCEOs[14].
The average percentages of females and ethnic minorities in audit committees(PCTWAUD and PCTMAUD) are 11.8 and 5.4 per cent, respectively. The averagepercentages of female directors and ethnic minority directors on boards are 38.2 and 4.1per cent, respectively (untabulated). We find that 6.8 per cent of our sample firms haveaudit committees with female chairs (WAUDCHR), while only 0.2 per cent of the samplefirms have audit committees with ethnic minority chairs (MAUDCHR). In addition,we find 5.1 per cent of our sample firms have CEOs with financial expertise(DCEOFINEXP).
Consistent with prior research, we control for other variables associated with auditfees and audit delay (Ettredge et al., 2006; Raghunandan and Rama, 2006; Masli et al.,2010). Table I presents the definition of variables, directional expectations andreferences to existing studies. For audit fee analyses, the control variables are modeledafter Raghunandan and Rama (2006) and Masli et al. (2010). More specifically, we controlfor firm size (SIZE), complexity (RECINV, FOREIGN, GEOSEG), risk (LIQ, LEV),industry, financial condition (ROA, LOSS, RESTRUCT, BANKRUPTCY and ABSDA),the presence of material control weaknesses (COUNTWEAK), restatements(RESTATE), audit opinion (GCONCERN), auditor type (BIG4), SOX era and firm age(FIRMAGE). In addition, we include several control variables for board characteristicsand other CEO attributes (Carcello et al., 2002; Adams and Ferreira, 2009; and Bliss,2011) (Table II).
For our audit delay analyses, the control variables are modeled after Ettredge et al.(2006) and Masli et al. (2010). With the exception of RECINV, FOREIGN, LIQ and BIG4,we control for the same variables as those in our audit fee model. We also control forwhether the firm had a change in auditors (AUDITCHG), reported extraordinary items(EXT) and received an audit opinion other than unqualified opinion (AUDOPIN).Finally, we control for audit fees (LAFEE), as audit fees are associated with auditdelay[15].
Table III provides the distribution of our sample firms across 48 industries based onthe Fama and French (1997) industry classifications. The top 5 industries in our sampleare Computers, Measuring and Control Equipment, Communication, Restaurants,Hotels and Motels, and Real Estate. Table III shows that there are variations of audit feesand audit delay across 48 different industries.
Table IV presents the correlation matrix among audit fees, audit delay, gender andethnicity variables and expertise variables. The correlation between audit fees and auditdelay is positive and significant. We find significant and positive correlations betweenaudit fees and WWCEOs, WMCEOs and MMCEOs, supporting the demand-sideargument of audit pricing. We observe negative correlations between audit delay andWWCEOs, WMCEOs, and MMCEOs, suggesting that female and minority CEOs aremore sensitive to the pressure to avoid audit delay. We find similar evidence that theproportion of ethnic minority audit committee members (PCTMAUD) is positively
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Table I.Variable definitions
Var
iabl
eE
xpec
ted
sign
for
LAFE
EE
xpec
ted
sign
for
LAD
ELA
YD
efini
tion
Dep
ende
ntva
riab
les
LAFE
E�
Nat
ural
log
ofau
ditf
ee(R
aghu
nand
anan
dR
ama,
2006
)LA
DE
LAY
Nat
ural
log
ofth
enu
mbe
rof
cale
ndar
days
from
fisca
lyea
ren
dto
the
date
ofau
dito
r’sre
port
(Ett
redg
eet
al.,
2006
)
Inde
pend
entv
aria
bles
WW
CEO
?�
Dum
my
vari
able
equa
lson
eif
CEO
isa
whi
tefe
mal
eW
MCE
O?
�D
umm
yva
riab
leeq
uals
one
ifCE
Ois
anet
hnic
min
ority
(Bla
ck,H
ispa
nic
orA
sian
)fem
ale
MM
CEO
?�
Dum
my
vari
able
equa
lson
eif
CEO
isan
ethn
icm
inor
ity(B
lack
,His
pani
cor
Asi
an)m
ale
PCT
WA
UD
??
Rat
ioof
wom
enin
audi
tcom
mitt
eeto
audi
tcom
mitt
eesi
zePC
TM
AU
D?
?R
atio
ofet
hnic
min
ority
inau
ditc
omm
ittee
toau
ditc
omm
ittee
size
PCT
AU
DFI
N�
�R
atio
ofau
ditc
omm
ittee
mem
bers
with
finan
cial
expe
rtis
eto
audi
tcom
mitt
eesi
zePC
TA
UD
CON
S?
?R
atio
ofau
ditc
omm
ittee
mem
bers
with
gene
ralc
onsu
lting
expe
rtis
eto
audi
tcom
mitt
eesi
zePC
TA
UD
LEG
L?
?R
atio
ofau
ditc
omm
ittee
mem
bers
with
lega
lexp
ertis
eto
audi
tcom
mitt
eesi
zePC
TA
UD
EX
EC
��
Rat
ioof
audi
tcom
mitt
eem
embe
rsw
ithm
anag
emen
texp
ertis
eto
audi
tcom
mitt
eesi
zeW
AU
DCH
R�
?D
umm
yva
riab
leeq
uals
one
ifth
ech
air
ofth
eau
ditc
omm
ittee
isfe
mal
e(It
tone
net
al.,
2010
)M
AU
DCH
R?
?D
umm
yva
riab
leeq
uals
one
ifth
ech
air
ofth
eau
ditc
omm
ittee
iset
hnic
min
ority
DCE
OFI
NE
XP
��
Dum
my
vari
able
equa
lson
eif
the
CEO
has
finan
cial
expe
rtis
eSI
ZE�
�N
atur
allo
gof
tota
lass
ets
(Rag
huna
ndan
and
Ram
a,20
06;E
ttre
dge
etal
.,20
06;M
asli
etal
.,20
10)
RE
CIN
V�
Rat
ioof
acco
untr
ecei
vabl
espl
usin
vent
ory
toto
tala
sset
s(R
aghu
nand
anan
dR
ama,
2006
;M
asli
etal
.,20
10)
FOR
EIG
N�
Dum
my
vari
able
equa
lson
eif
firm
has
fore
ign
exch
ange
inco
me/
loss
(Mas
liet
al.,
2010
)G
EO
SEG
��
Num
ber
ofge
ogra
phic
alse
gmen
ts(M
asli
etal
.,20
10)
LIQ
�R
atio
ofcu
rren
tass
ets
tocu
rren
tlia
bilit
ies
(Rag
huna
ndan
and
Ram
a,20
06;M
asli
etal
.,20
10)
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tinue
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Table I.
Var
iabl
eE
xpec
ted
sign
for
LAFE
EE
xpec
ted
sign
for
LAD
ELA
YD
efini
tion
LEV
��
Tot
alde
bts
divi
ded
byto
tala
sset
s( R
aghu
nand
anan
dR
ama,
2006
;Ett
redg
eet
al.,
2006
;M
asli
etal
.,20
10)
RO
A�
�R
etur
non
asse
ts(o
pera
ting
inco
me
divi
ded
byto
tala
sset
s)(R
aghu
nand
anan
dR
ama,
2006
;E
ttre
dge
etal
.,20
06;M
asli
etal
.,20
10)
GCO
NCE
RN
��
Dum
my
vari
able
equa
lson
eif
the
firm
rece
ived
ago
ing
conc
ern
audi
topi
nion
(Rag
huna
ndan
and
Ram
a,20
06;E
ttre
dge
etal
.,20
06;M
asli
etal
.,20
10)
BIG
4�
Dum
my
vari
able
equa
lson
eif
the
firm
isau
dite
dby
aB
ig4
audi
tor
(Rag
huna
ndan
and
Ram
a,20
06;M
asli
etal
.,20
10)
COU
NT
WE
AK
��
Num
ber
ofre
port
edm
ater
ialc
ontr
olw
eakn
esse
s(R
aghu
nand
anan
dR
ama,
2006
;Ett
redg
eet
al.,
2006
)LO
SS�
�D
umm
yva
riab
leeq
uals
one
iffir
ms
repo
rted
nega
tive
neti
ncom
e(E
ttre
dge
etal
.,20
06;
Mas
liet
al.,
2010
)FI
RM
AG
E?
�N
umbe
rof
year
sth
efir
mha
sbe
entr
adin
gin
ast
ock
exch
ange
calc
ulat
edas
the
diff
eren
cebe
twee
nth
ecu
rren
tyea
ran
dth
eye
arth
efir
mst
arte
dtr
adin
g(th
efir
stye
arit
had
data
avai
labl
ein
CRSP
)(M
asli
etal
.,20
10)
RE
STA
TE
��
Dum
my
vari
able
equa
lson
eif
the
firm
repo
rted
are
stat
emen
t(E
ttre
dge
etal
.,20
06;M
asli
etal
.,20
10)
RE
STR
UCT
�Pr
e-ta
xre
stru
ctur
ing
char
ges
over
mar
ketv
alue
ofeq
uity
(Mas
liet
al.,
2010
)B
AN
KR
UPT
CY�
�T
hede
cile
rank
ofA
ltman
’sZ
scor
e(M
asli
etal
.,20
10)
AB
SDA
��
The
abso
lute
valu
epe
rfor
man
ce-m
atch
eddi
scre
tiona
ryac
crua
lses
timat
edfr
omK
otha
riet
al.(
2005
)(M
asli
etal
.,20
10)
POST
SOX
��
Dum
my
vari
able
equa
lson
eif
year
isaf
ter
the
Sarb
anes
-Oxl
eyA
ctof
2002
(Mas
liet
al,
2010
)D
ECE
MB
ER
��
Dum
my
vari
able
equa
lson
eif
the
firm
has
aca
lend
ar(D
ecem
ber)
year
end
AU
DIT
CHG
�D
umm
yva
riab
leeq
uals
one
ifth
efir
mre
port
eda
chan
gein
audi
tors
(Ett
redg
eet
al.,
2006
;M
asli
etal
.,20
10)
(con
tinue
d)
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Table I.
Var
iabl
eE
xpec
ted
sign
for
LAFE
EE
xpec
ted
sign
for
LAD
ELA
YD
efini
tion
EX
T�
Dum
my
vari
able
equa
lson
eif
the
firm
repo
rted
extr
aord
inar
yite
ms
( Ett
redg
eet
al.,
2006
)A
UD
OPI
N�
Dum
my
vari
able
equa
lson
eif
the
firm
rece
ived
othe
rth
ana
stan
dard
unqu
alifi
edau
dit
opin
ion
(Ett
redg
eet
al.,
2006
)B
OD
SIZE
�?
Tot
alnu
mbe
rof
boar
dm
embe
rs(B
liss,
2011
)PC
TO
D�
?R
atio
ofou
tsid
ebo
ard
mem
bers
tobo
ard
size
(Car
cello
etal
.,20
02)
CEO
CHA
IR�
?D
umm
yva
riab
leeq
uals
one
ifth
eCE
Ois
also
the
chai
rof
the
boar
d(B
liss,
2011
)B
OD
NM
EE
T�
?N
umbe
rof
boar
dm
eetin
gsdu
ring
the
year
(Car
cello
etal
.,20
02)
CEO
TE
NU
RE
??
Num
ber
ofye
ars
the
curr
entC
EO
has
serv
edas
aCE
Oof
the
firm
CEO
TU
RN
�?
Dum
my
vari
able
equa
lson
eif
ther
eis
aCE
Otu
rnov
erdu
ring
the
year
BO
DT
EN
UR
E?
?A
vera
genu
mbe
rof
year
sth
ebo
ard
mem
bers
have
serv
edas
dire
ctor
sof
the
firm
(Ada
ms
and
Ferr
eira
,200
9)
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Table II.Sample statistics
Variable Mean SD 10% 25% 50% 75% 90%
AUDIT FEE ($ million) 3.024 5.802 0.343 0.663 1.337 3.100 6.600AUDITDELAY (days) 54.888 29.831 29 44 56 62 73WWCEO 0.072 0.259 0 0 0 0 0WMCEO 0.020 0.142 0 0 0 0 0MMCEO 0.060 0.237 0 0 0 0 0PCTWAUD 0.118 0.161 0 0 0 0.2 0.333PCTMAUD 0.054 0.119 0 0 0 0 0.25PCTAUDFIN 0.005 0.041 0 0 0 0 0PCTAUDCONS 0.003 0.035 0 0 0 0 0PCTAUDLEGL 0.007 0.045 0 0 0 0 0PCTAUDEXEC 0.128 0.227 0 0 0 0.25 0.50WAUDCHR 0.068 0.252 0 0 0 0 0MAUDCHR 0.002 0.048 0 0 0 0 0DCEOFINEXP 0.051 0.219 0 0 0 0 0TOTAL ASSET ($ million) 12,184 65,050 324.62 703.39 1,887 6,128 20,865RECINV 0.237 0.1698 0.048 0.101 0.211 0.330 0.460FOREIGN 0.123 0.328 0 0 0 0 1GEOSEG 4.477 4.775 1 2 2 6 11LIQ 2.207 2.455 0 1.061 1.713 2.674 4.221LEV 0.218 0.184 0 0.050 0.204 0.337 0.459ROA 0.034 0.181 �0.033 0.016 0.048 0.086 0.129GCONCERN 0.002 0.049 0 0 0 0 0BIG4 0.927 0.260 1 1 1 1 1DWEAK 0.029 0.168 0 0 0 0 0LOSS 0.163 0.369 0 0 0 0 1FIRMAGE 24.518 19.536 6 10 18 35 52RESTATE 0.067 0.251 0 0 0 0 0RESTRUCT 0.008 0.143 �0.013 �0.002 0 0 0BANKRUPTCY 4.797 2.710 1 2 5 7 9ABSDA 0.131 0.230 0 0.048 0.102 0.164 0.236POSTSOX 0.762 0.426 0 1 1 1 1DECEMBER 0.691 0.462 0 0 1 1 1AUDITCHG 0.132 0.338 0 0 0 0 1EXT 0.092 0.289 0 0 0 0 0AUDOPIN 0.505 0.500 0 0 1 1 1BODSIZE 2.182 0.261 1.792 1.946 2.197 2.398 2.485PCTOD 0.716 0.154 0.5 0.625 0.75 0.833 0.889CEOCHAIR 0.708 0.455 0 0 1 1 1BODNMEET 5.288 2.178 3 4 5 6 9CEOTENURE 15.477 9.360 5 9 13 20 28CEOTURN 0.016 0.127 0 0 0 0 0BODTENURE 7.389 4.022 3 5 7 9 12.5
Notes: AUDITFEE is the total dollar audit fee ($ million); AUDITDELAY is the number of calendardays from fiscal yearend to the date of auditor’s report (days); TOTAL ASSET is the total asset($ million); we use the natural log of AUDITFEE, AUDITDELAY and TOTAL ASSET in the regressionanalyses; see Table I for other variable definitions
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Table III.Sample distributionacross Fama–French48 industries
Industries Frequency (%) LAFEE LADELAY
Agriculture 33 0.27 14.275 4.120Food products 238 1.96 14.291 3.955Candy and soda 24 0.20 14.498 3.853Beer and liquor 50 0.41 15.211 3.915Tobacco products 20 0.16 16.047 3.670Recreation 72 0.59 14.326 4.042Entertainment 72 0.59 13.633 4.045Printing and publishing 121 1.00 14.186 3.847Consumer goods 215 1.77 14.419 3.865Apparel 173 1.42 13.915 3.978Health care 216 1.78 13.809 4.062Medical equipment 344 2.83 14.116 3.952Pharmaceutical products 490 4.03 13.998 3.949Chemicals 341 2.81 14.597 3.917Rubber and plastic products 75 0.62 14.164 3.983Textiles 35 0.29 14.249 3.864Construction materials 226 1.86 14.001 3.906Construction 181 1.49 14.067 3.856Steel works 185 1.52 14.133 3.879Fabricated products 10 0.08 13.322 4.084Machinery 556 4.58 14.351 3.907Electrical equipment 175 1.44 14.367 3.955Automobiles and trucks 88 0.72 14.406 4.029Aircraft 194 1.60 14.204 3.961Shipbuilding, railroad equipment 92 0.76 15.470 3.759Defense 18 0.15 14.494 4.047Precious metals 58 0.48 13.934 4.100Non-Metallic and industrial metal mining 15 0.12 14.242 3.709Coal 51 0.42 13.980 3.979Petroleum and natural gas 23 0.19 14.078 3.950Utilities 473 3.89 14.375 4.043Communication 804 6.62 14.504 3.982Personal services 247 2.03 14.655 3.970Business services 116 0.95 13.867 4.083Computers 1,267 10.43 14.070 3.925Electronic equipment 433 3.56 14.292 3.931Measuring and control equipment 879 7.23 13.971 3.909Business supplies 291 2.39 14.200 3.931Shipping containers 201 1.65 14.468 3.876Transportation 63 0.52 14.306 3.834Wholesale 330 2.72 13.835 3.856Retail 419 3.45 14.147 3.996Restaurants, hotels and motels 772 6.35 13.760 3.952Banking 250 2.06 13.566 4.004Insurance 78 0.64 15.253 3.897Real estate 583 4.80 14.664 3.964Trading 15 0.12 14.231 4.020Others 541 4.45 13.979 4.028
Notes: LAFEE is the natural log of audit fee; LADELAY is the natural log of audit delay
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Table IV.Correlationcoefficients
No.
Var
iabl
es1
23
45
67
89
1011
1213
1LA
FEE
12
LAD
ELA
Y0.
202*
13
WW
CEO
0.01
2*�
0.06
5*1
4W
MCE
O0.
131*
�0.
043*
�0.
021*
15
MM
CEO
0.11
7*�
0.05
2*�
0.03
5*�
0.01
9*1
6PC
TW
AU
D0.
170
�0.
035*
0.10
6*0.
085*
0.04
0*1
7PC
TM
AU
D0.
259*
�0.
046*
0.01
60.
153*
0.16
9*0.
174*
18
PCT
AU
DFI
N�
0.08
6�
0.04
9�
0.00
8�
0.00
3�
0.00
8�
0.00
7�
0.01
21
9PC
TA
UD
CON
S0.
062*
�0.
050
�0.
015
�0.
013
�0.
017*
�0.
021
�0.
030*
�0.
002
110
PCT
AU
DLE
GL
�0.
097
�0.
129*
�0.
020*
�0.
011
�0.
010
�0.
028*
�0.
008
0.02
9*0.
019
111
PCT
AU
DE
XE
C�
0.00
1*�
0.03
10.
103*
0.10
3*0.
091*
0.02
6*0.
044*
0.04
6*�
0.01
5�
0.01
91
12W
AU
DCH
R�
0.07
8*�
0.01
80.
018
0.03
5*0.
021
0.23
9*0.
092*
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015
�0.
018
�0.
010
0.01
31
13M
AU
DCH
R0.
040
�0.
003
�0.
004
0.03
4*0.
009
0.02
4*0.
099*
�0.
006
�0.
005
�0.
010
0.00
90.
041*
114
DCE
OFI
NE
XP
�0.
090*
�0.
004*
0.02
5*0.
045*
0.02
1*0.
018
0.01
70.
124*
�0.
017
�0.
014
�0.
042*
0.00
50.
005
Not
es:
See
Tab
leIf
orva
riab
lede
finiti
ons;
*ind
icat
essi
gnifi
cant
at1%
orle
ss
979
Impact ofdemographic
characteristics
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t 03:
19 2
7 Ju
ly 2
016
(PT
)
correlated with audit fees and negatively correlated with audit delay. We find that theproportion of female audit committee members (PCTWAUD) is not correlated withaudit fees, but negatively correlated with audit delay. However, firms with female auditcommittee chairs (WAUDCHR) are associated with lower fees, consistent with thesupply-side argument of audit pricing and the result of Ittonen et al. (2010).
The correlations among audit fees, audit delay and the rest of the control variablesare consistent with prior research. For the sake of brevity, we do not discuss thesecorrelations in detail (untabulated). However, we check the variance inflation factor(VIF) in every regression and find that the VIF is less than 10. Therefore, we believe thatour analysis is not subject to multicollinearity.
3.2 Multivariate regression resultsWe examine the impact of gender and ethnicity of CEOs and audit committee memberson audit fees and audit delay using a multivariate regression analysis with a two-wayclustering based on firms and years and robust standard errors. Because there arevariations in audit fees and audit delay across different industries and across differentperiods, we also control for Fama and French 48 industries and years[16]. Table Vreports the OLS regression results.
First, we find that firms with WWCEOs pay about $106 million higher audit feesthan firms with white male CEOs[17]. The coefficient of WWCEO is positive andstatistically significant at the 0.01 level. We also find that firms with WMCEOs andMMCEOs pay about $114 million and $109 million higher audit fees than firms withwhite male CEOs. The coefficients of WMCEO and MMCEO are positive andsignificant at the 0.01 level. These results support our first set of hypotheses (H1aand H1b), consistent with the demand-side argument of audit fees. Our resultssuggests that both female and ethnic minority CEOs demand higher audit effort andare willing to pay higher audit fees[18].
With respect to audit committees, we find that the percentage of ethnic minority auditcommittee members (PCTMAUD) is positively associated with higher audit fees(significant at the 0.01 level). This result is consistent with the demand-side argument ofaudit pricing. However, we do not find evidence that the percentage of female auditcommittee members (PCTWAUD) is associated with audit fees. Our result supportsH2b, but not H2a. Controlling for female audit committee chairs (WAUDCHR) in theaudit fee regression, we find that the coefficient of WAUDCHR is negative andstatistically significant, suggesting that female chairs are associated with lower auditfees. This result is consistent with Ittonen et al. (2010), providing support for thesupply-side argument.
In the audit delay analyses, we document that firms with WWCEOs have aboutone day lower audit delay than those with white male CEOs (significant at the 0.01level)[19]. We do not find a similar result for WMCEOs. Although it is negative, thecoefficient of WMCEOs is not statistically significant. This weak result is likelybecause the percentage of firms with WMCEOs is very small. Similarly, we find thatthe presence of MMCEOs is not associated with audit delay. In a separate regression(untabulated), we used two indicator variables for female CEOs (WCEO) and ethnicminority CEOs (MCEO) instead of using the three dummies (WWCEOs, WMCEOsand MMCEOs). The coefficient of WCEO is negative and statistically significant,while that of MCEO is not significantly different from 0, suggesting that white
MAJ30,8/9
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016
(PT
)
Table V.OLS regression of
audit fees and auditdelay on woman and
minority CEOs andaudit committee
members
Var
iabl
esE
xpec
ted
sign
sLA
FEE
LAFE
EE
xpec
ted
sign
sLA
DE
LAY
LAD
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Y
WW
CEO
?0.
0660
(3.4
4)**
*0.
0646
(3.3
7)**
*�
�0.
0498
(3.7
0)**
*�
0.04
94(3
.68)
***
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CEO
?0.
1324
(3.8
0)**
*0.
1315
(3.7
8)**
*�
�0.
0087
(0.3
8)�
0.00
80(0
.35)
MM
CEO
?0.
0875
(4.2
3)**
*0.
0879
(4.2
5)**
*–
0.00
73(0
.58)
0.00
73(0
.57)
PCT
WA
UD
?�
0.00
46(0
.13)
0.03
08(0
.85)
?�
0.03
69(3
.71)
***
�0.
0350
(3.4
2)**
*PC
TM
AU
D?
0.13
05(2
.94)
***
0.12
94(2
.91)
***
?�
0.02
47(1
.95)
*�
0.02
42(1
.92)
*PC
TA
UD
FIN
��
0.01
29(0
.10)
�0.
0150
(0.1
2)�
0.06
36(0
.70)
0.06
25(0
.69)
PCT
AU
DCO
NS
?0.
4189
(2.8
1)**
*0.
4179
(2.8
0)**
*?
�0.
0394
(0.3
2)�
0.03
97(0
.33)
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AU
DLE
GL
?�
0.06
92(0
.58)
�0.
0654
(0.5
5)?
�0.
2933
(3.2
6)**
*�
0.29
34(3
.26)
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XE
C�
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0923
(3.2
1)**
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.32)
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AU
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(3.0
5)**
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9)M
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0.08
21(0
.90)
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0.01
70(0
.25)
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.02)
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0.04
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9.38
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5.95
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.22)
0.62
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.19)
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0.83
)***
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4)**
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(1.3
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(1.3
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981
Impact ofdemographic
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7 Ju
ly 2
016
(PT
)
Table V.
Var
iabl
esE
xpec
ted
sign
sLA
FEE
LAFE
EE
xpec
ted
sign
sLA
DE
LAY
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Y
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8)**
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6)**
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)***
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ared
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3665
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rcep
tY
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esY
esY
es
Not
es:
See
Tab
leIf
orva
riab
lede
finiti
ons;
the
Fam
a–Fr
ench
48in
dust
rydu
mm
ies
and
year
dum
mie
sar
ein
clud
edin
the
regr
essi
onbu
tare
notr
epor
ted;
robu
stab
solu
teva
lues
oft-s
tatis
tics
with
both
firm
and
year
clus
teri
ngar
ein
pare
nthe
ses;
*,**
,and
***s
igni
fican
tat1
0,5
and
1%
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ly 2
016
(PT
)
female CEOs drive the results for female CEOs. Overall, our results support H3a, butnot H3b. Female CEOs seem to be more sensitive to the social pressure to avoid auditdelay than male CEOs.
We find that a higher percentage of female audit committee members will reduceaudit delay by about one day. In addition, we show that a higher percentage of ethnicminorities in audit committees will reduce audit delay by about one day. Thesefindings provide support to our fourth set of hypotheses (H4a and H4b) that femaleand ethnic minority audit committee members are associated with shorter auditdelay.
Srinidhi et al. (2011) demonstrate that the probability of firms having a women CEOis endogenous. We address this endogeneity issue by conducting the first-stage probit(tobit) regressions based on Srinidhi et al. (2011). We use probit regressions forexamining factors that influence the probability of having a white women CEO(PROB(WWCEO)), an ethnic minority women CEO (PROB(WMCEO)) and an ethnicminority male CEO (PROB(MMCEO)). We use tobit regressions to estimate thepercentage of women (PCTWAUD) and ethnic minority (PCTMAUD) in auditcommittees[20]. We present the results in Table VI. Examining the results of the fiveregressions, we find that firm size (SIZE), firm age (FIRMAGE), average number ofoutside directors (DIRECTORSHIP) and the percentage of female and ethnic minorityemployees in a specific industry are positively associated with the probability ofappointing WWCEOs, WMCEOs and MMCEOs and with the percentage of female andethnic minority audit committee members. Overall, our first-stage probit (tobit) resultsare consistent with Srinidhi et al. (2011).
We estimate the inverse Mills ratios from the tobit regressions[21] and include theratios (�WWCEO, �WMCEO, �MMCEO, �WWCEO, �WMCEO) in the second-stageregressions. Table VII presents the second-stage regression results for audit fees andaudit delay. The inverse Mills ratios are statistically significant in all of the audit feeregressions and most of the audit delay regressions, indicating the existence of aself-selection bias in our OLS regressions. Controlling for the inverse Mills ratios, wenote that the results, both economic and statistical significance, for the CEO gender andethnicity as well as the audit committee gender and ethnicity are similar to those of theOLS regressions. Thus, our conclusions remain robust.
The regression results in Tables V and VII include the control variables for firmcharacteristics that could affect the strength of the internal control environment and,thus, audit fees and audit delay. The signs of the coefficients of the control variables areconsistent with prior research. COUNTWEAK (the number of material weaknessesreported), for example, is associated with higher audit fees and longer audit delay,supporting the supply-side argument of audit pricing. The presence of reported materialcontrol weaknesses would require that the auditor perform additional tests, leading tohigher audit fees and longer audit delay.
Despite our effort to control for the internal control environment in the regressionmodels, we have not completely ruled out the alternative explanation that firms withfemale or ethnic minority CEOs may have, on average, a weaker internal controlsystem than those with male Caucasian CEOs. Therefore, our CEO variables(WWCEO, WMCEO and MMCEO) could capture the weak control system thatrequires the auditor to perform more audit services and charge higher fees, ratherthan the demand for greater assurance. Similarly, audit committees with higher
983
Impact ofdemographic
characteristics
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(PT
)
Table VI.First stage probitand tobit regressionsof woman and ethnicminority CEO andpercentage of womanand ethnic minoritydirectors on auditcommittees
Var
iabl
esPR
OB
(WW
CEO
)PR
OB
(WM
CEO
)PR
OB
(MM
CEO
)T
OB
IT(P
CTW
AU
D)
TO
BIT
(PCT
MA
UD
)
RO
A�
0.34
74(2
.21)
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0.06
85(0
.17)
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(1.4
6)0.
0184
(0.6
5)0.
0217
(0.4
5)SI
ZE0.
0305
(2.1
2)**
0.16
33(7
.92)
***
0.13
84(9
.44)
***
0.02
75(9
.86)
***
0.07
77(1
9.00
)***
FIR
MA
GE
0.00
56(5
.59)
***
0.00
70(4
.84)
***
0.00
22(2
.23)
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(8.1
6)**
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0017
(6.2
7)**
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(1.9
9)**
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.07)
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(4.0
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44(5
.95)
***
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0.05
46(6
.27)
***
0.10
25(7
.70)
***
0.03
30(3
.57)
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0.02
32(1
2.33
)***
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0.78
)***
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es:
RO
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s;FI
RM
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num
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port
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Com
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at;S
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Wis
the
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-to-y
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tsal
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thre
epr
eced
ing
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s;D
IRE
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the
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age
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side
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exec
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ors;
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eof
the
ithin
dust
ryse
gmen
tin
the
tota
lnet
sale
sof
the
firm
;TO
TR
ISK
isst
anda
rdde
viat
ion
ofda
ilyre
turn
sov
era
fisca
lyea
r;T
OB
INQ
isth
eT
obin
’sQ
ratio
calc
ulat
edas
the
book
valu
eof
asse
tsm
inus
the
book
valu
eof
equi
ties
plus
the
mar
ketv
alue
ofeq
uitie
sdi
vide
dby
the
book
valu
eof
asse
ts;R
ET
isth
ean
nual
stoc
kre
turn
duri
ngth
efis
caly
ear;
VW
RE
TD
isth
eva
lue
wei
ghte
dm
arke
tret
urn
duri
ngth
efis
caly
ear;
IND
WW
PCT
(IND
WM
PCT
,IN
DM
MPC
T)
isth
epe
rcen
tage
ofem
ploy
ees
who
wer
ew
hite
wom
en(m
inor
ityw
omen
,min
ority
men
)in
each
indu
stry
cate
gory
asre
port
edby
the
Bur
eau
ofLa
bora
ndSt
atis
tics;
IND
WPC
T(IN
DM
PCT
)is
the
perc
enta
geof
empl
oyee
sw
how
ere
wom
en(e
thni
cm
inor
ity)i
nea
chin
dust
ryca
tego
ryas
repo
rted
byth
eB
urea
uof
Labo
ran
dSt
atis
tics;
the
Fam
a–Fr
ench
48in
dust
rydu
mm
ies
and
year
dum
mie
sar
ein
clud
edin
the
regr
essi
onbu
tare
notr
epor
ted;
robu
stz-
stat
istic
sw
ithbo
thfir
man
dye
arcl
uste
ring
are
repo
rted
inpa
rent
hese
s(z
-sta
tistic
sis
the
squa
rero
otof
Chi-s
quar
ed);
*,**
,and
***s
igni
fican
tat1
0,5
and
1%MAJ30,8/9
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Table VII.Second stage
regressions of auditfees and audit delay
on woman andminority CEOs and
audit committeemembers
Var
iabl
esE
xpec
ted
sign
sLA
FEE
LAFE
EE
xpec
ted
sign
sLA
DE
LAY
LAD
ELA
Y
WW
CEO
?0.
0611
(3.2
0)**
*0.
0599
(3.1
4)**
*�
�0.
0482
(3.6
2)**
*�
0.04
79(3
.60)
***
WM
CEO
?0.
1278
(3.7
0)**
*0.
1270
(3.6
8)**
*�
�0.
0094
(0.4
1)�
0.00
87(0
.38)
MM
CEO
?0.
0869
(4.2
2)**
*0.
0873
(4.2
4)**
*�
0.00
62(0
.49)
0.00
61(0
.48)
PCT
WA
UD
?0.
0017
(0.0
5)0.
0345
(0.9
5)?
�0.
0302
(2.9
9)**
*�
0.02
81(2
.72)
***
PCT
MA
UD
?0.
1060
(2.4
1)**
0.10
48(2
.37)
**?
�0.
0267
(2.1
2)**
�0.
0262
(2.0
8)**
PCT
AU
DFI
N�
�0.
0133
(0.1
1)�
0.01
49(0
.12)
�0.
0648
(0.7
2)0.
0638
(0.7
0)PC
TA
UD
CON
S?
0.40
01(2
.70)
***
0.39
96(2
.70)
***
?�
0.02
78(0
.23)
�0.
0281
(0.2
3)PC
TA
UD
LEG
L?
�0.
0660
(0.5
5)�
0.06
21(0
.51)
?�
0.30
22(3
.41)
***
�0.
3021
(3.4
1)**
*PC
TA
UD
EX
EC
��
0.09
02(3
.15)
***
�0.
0892
(3.1
2)**
*�
�0.
0074
(0.3
8)�
0.00
71(0
.37)
WA
UD
CHR
��
0.05
66(2
.83)
***
?�
0.01
21(1
.04)
MA
UD
CHR
?0.
0854
(0.9
6)?
�0.
0163
(0.2
4)D
CEO
FIN
EX
P�
�0.
0458
(2.1
9)**
�0.
0465
(2.2
2)**
��
0.02
26(1
.85)
*�
0.02
28(1
.86)
*SI
ZE�
0.67
92(2
2.38
)***
0.67
92(2
2.39
)***
��
0.07
76(3
.39)
***
�0.
0774
(3.3
9)**
*R
ECI
NV
�0.
6853
(15.
77)*
**0.
6857
(15.
81)*
**FO
RE
IGN
�0.
5573
(1.0
3)0.
5432
(1.0
1)G
EO
SEG
�0.
0179
(20.
12)*
**0.
0179
(20.
15)*
**�
0.00
07(1
.44)
0.00
07(1
.45)
LIQ
��
0.01
40(5
.20)
***
�0.
0140
(5.2
0)**
*LE
V�
�0.
0229
(1.2
9)�
0.02
27(1
.28)
�0.
1474
(6.5
9)**
*0.
1478
(6.6
0)**
*R
OA
��
0.20
04(3
.73)
***
�0.
2016
(3.7
6)**
*�
�0.
0149
(0.3
1)�
0.01
56(0
.33)
GCO
NCE
RN
�0.
2871
(2.4
2)**
0.28
46(2
.41)
**�
0.43
34(4
.95)
***
0.43
29(4
.95)
***
BIG
4�
0.03
42(1
.57)
0.03
33(1
.52)
COU
NT
WE
AK
�0.
1727
(8.4
5)**
*0.
1724
(8.4
3)**
*�
0.10
91(6
.83)
***
0.10
92(6
.83)
***
LOSS
�0.
0979
(5.0
0)**
*0.
0974
(4.9
8)**
*�
0.03
79(3
.30)
***
0.03
78(3
.29)
***
FIR
MA
GE
?�
0.00
06(0
.87)
�0.
0006
(0.8
3)�
�0.
0006
(1.5
4)�
0.00
06(1
.51)
RE
STA
TE
�0.
0630
(3.2
1)**
*0.
0624
(3.1
8)**
*�
0.03
47(3
.96)
***
0.03
45(3
.92)
***
RE
STR
UCT
�0.
0394
(2.2
6)**
0.03
97(2
.29)
**�
0.04
71(1
.76)
*0.
0471
(1.7
7)*
BA
NK
RU
PTCY
��
0.04
19(1
3.86
)***
�0.
0420
(13.
88)*
**�
�0.
0030
(1.5
9)�
0.00
30(1
.58)
(con
tinue
d)
985
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characteristics
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Table VII.
Var
iabl
esE
xpec
ted
sign
sLA
FEE
LAFE
EE
xpec
ted
sign
sLA
DE
LAY
LAD
ELA
Y
AB
SDA
�0.
3122
(7.6
3)**
*0.
3105
(7.6
0)**
*�
0.01
15(0
.36)
0.01
09(0
.34)
POST
SOX
�0.
4178
(6.5
4)**
*0.
4166
(6.5
2)**
*�
0.23
21(6
.20)
***
0.23
19(6
.19)
***
DE
CEM
BE
R�
0.13
98(1
0.78
)***
0.13
92(1
0.74
)***
�0.
0167
(2.2
7)**
0.01
67(2
.27)
**LA
FEE
�0.
0984
(13.
40)*
**0.
0982
(13.
37)*
**A
UD
ITCH
G�
0.05
26(3
.33)
***
0.05
26(3
.34)
***
EX
T�
0.07
28(5
.22)
***
0.07
30(5
.22)
***
AU
DO
PIN
�0.
0320
(4.9
4)**
*0.
0321
(4.9
4)**
*
Cor
pora
tego
vern
ance
cont
rolv
aria
bles
BSI
ZE�
0.06
03(1
.14)
0.06
36(1
.21)
?�
0.03
24(1
.03)
�0.
0321
(1.0
2)PC
TO
D�
0.25
40(5
.69)
***
0.25
50(5
.71)
***
?�
0.21
01(7
.38)
***
�0.
2103
(7.3
9)**
*CE
OCH
AIR
�0.
0031
(0.2
7)0.
0036
(0.3
1)?
0.01
16(1
.83)
*0.
0117
(1.8
4)*
BO
DN
ME
ET
��
0.01
58(1
.38)
�0.
0155
(1.3
5)?
�0.
0012
(0.8
3)�
0.00
12(0
.83)
CEO
TE
NU
RE
?0.
0013
(1.9
3)*
0.00
12(1
.90)
*?
0.00
08(2
.19)
**0.
0008
(2.1
8)**
CEO
TU
RN
�0.
0483
(1.1
6)0.
0504
(1.2
2)?
0.00
22(0
.08)
0.00
26(0
.10)
BO
DT
EN
UR
E?
�0.
0076
(5.3
4)**
*�
0.00
77(5
.42)
***
?�
0.00
17(2
.04)
**�
0.00
17(2
.08)
**�
WW
CEO
0.56
50(2
.96)
***
0.55
56(2
.91)
***
�0.
2440
(2.0
1)**
�0.
2424
(1.9
9)**
�W
MCE
O0.
8925
(3.4
1)**
*0.
8979
(3.4
4)**
*�
0.68
58(4
.67)
***
�0.
6852
(4.6
7)**
*�
MM
CEO
1.59
82(4
.30)
***
1.60
39(4
.32)
***
�0.
2558
(1.1
3)�
0.25
45(1
.13)
�PC
TW
AU
D2.
2484
(3.7
5)**
*2.
2529
(3.7
6)**
*�
2.69
36(7
.07)
***
�2.
6909
(7.0
6)**
*�
PCT
MA
UD
1.10
65(2
.89)
***
1.11
16(2
.91)
***
�0.
3247
(1.2
5)�
0.32
57(1
.26)
Obs
erva
tions
12,1
5312
,153
12,1
5312
,153
R-s
quar
ed0.
7951
0.79
520.
3625
0.36
25In
terc
ept
Yes
Yes
Yes
Yes
Not
es:
�W
WCE
O(�
WM
CEO
,�M
MCE
O)
isth
ein
vers
e-M
ills
ratio
for
whi
tefe
mal
eCE
O(e
thni
cm
inor
ityfe
mal
eCE
O,e
thni
cm
inor
itym
ale
CEO
)ca
lcul
ated
from
the
first
stag
ere
gres
sion
pres
ente
din
Tab
leV
I;�
PCT
WA
UD
(�PC
TM
AU
D)i
sth
ein
vers
e-M
ills
ratio
fore
thni
cm
inor
ityw
omen
CEO
that
isca
lcul
ated
from
thefi
rsts
tage
regr
essi
onpr
esen
ted
inT
able
VI;
seeT
able
Ifor
ther
emai
ning
vari
able
defin
ition
s;th
eFam
a–Fr
ench
48in
dust
rydu
mm
ies
and
year
dum
mie
sar
ein
clud
edin
the
regr
essi
onbu
tar
eno
tre
port
ed;r
obus
tab
solu
teva
lue
oft-s
tatis
tics
with
both
firm
and
year
clus
teri
ngar
ein
pare
nthe
ses;
;*,
**,a
nd**
*sig
nific
anta
t10,
5an
d1%
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percentage of minority directors (PCTMAUD) could be associated with a weakercontrol system and, thus, higher audit fees than audit committees with lowerpercentage of minority directors. To rule out this alternative explanation, we run theregressions of internal control weaknesses on the CEO and audit committeevariables and other control variables. We present the results in Table VIII.
The results show that the coefficients of the CEO variables (WWCEO, WMCEO andMMCEO) are not statistically significant. CEO gender and ethnicity are not associatedwith the presence and the number of material control weaknesses. Therefore, the resultsconfirm our main conclusion that firms with female and/or ethnic minority CEOs pay forhigher fees because of the greater demand for assurance and not because of the weakerinternal control system.
Shorter audit delay could result from a stronger internal control system (i.e.supply side) or a client’s demand for more efficient audit[22]. Because the results inTable VIII rule out the internal control explanation, we conclude that female CEOsreduce the likelihood of audit delay by demanding for a more efficient audit. Takentogether, our results in Tables IV and VI suggest that compared to firms with maleCaucasian CEOs, firms with female CEOs have higher audit fees and shorter auditdelay because they have preference for greater assurance (i.e. reliability of financialreporting) and more timely audit reporting (i.e. timeliness of audit reports andearnings).
Table VIII also reports that the percentages of female and ethnic minority directorson audit committees (PCTWAUD and PCTMAUD) are not associated with internalcontrol weaknesses. Thus, our results confirm that the greater percentage of ethnicminority directors in an audit committee is associated with higher audit fees because ofthe greater demand for assurance, rather than the weaker control environment. Withrespect to audit delay, our results confirm that greater percentages of female and ethnicminority in an audit committee are associated with shorter delay through the use ofmore efficient audit procedures.
3.3 Additional analysesOur main analyses use the percentages of female and ethnic minority audit committeemembers. We also run both regressions of audit fees and audit delay using thepercentage of female directors and ethnic minority directors on corporate boards. Ourresults are consistent with those of our main analyses with one exception. In the audit feeregression, the percentage of female directors (PCTWBOD) is positively associated withaudit fees, consistent with that of Gul et al. (2008). The coefficient of PCTWBOD remainspositive and significant after we control for the presence of female audit committeechairs (WAUDCHR). Consistent with Ittonen et al. (2010), the coefficient of WAUDCHRis negative and statistically significant. Overall, we conclude that the seeminglyconflicting results of Gul et al. (2008) and Ittonen et al. (2010) are due to the use ofdifferent groups (corporate boards vs audit committees).
We perform several robustness checks. First, we use the dollar value of audit fees andthe number of days of audit delays instead of the natural log of audit fees and the naturallog of audit delay, respectively. The results are weaker when we use the dollar value ofaudit fees and the number of days of audit delay due to the skewness of both variables.However, our conclusions remain unchanged. Second, we include additional corporategovernance control variables, such as GINDEX (Gompers et al., 2003) and entrenchment
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Table VIII.Second stageregressions ofinternal controlweakness on womanand minority CEOsand audit committeemembers
Variables DWEAK COUNTWEAK
WWCEO 0.0010 (0.17) 0.0380 (1.22)WMCEO 0.0065 (0.65) �0.0016 (0.09)MMCEO 0.0002 (0.04) �0.0050 (0.43)PCTWAUD 0.0112 (1.08) 0.0079 (0.31)PCTMAUD 0.0034 (0.26) �0.0168 (0.48)PCTAUDFIN �0.0297 (1.45) �0.0215 (0.48)PCTAUDCONS �0.0284 (2.43)** �0.0724 (2.26)**PCTAUDLEGL 0.0035 (0.39) 0.0199 (0.81)PCTAUDEXEC 0.0198 (1.70)* 0.0575 (1.49)WAUDCHR �0.0027 (0.46) �0.0142 (1.03)MAUDCHR 0.0832 (1.50) 0.1838 (1.58)DCEOFINEXP 0.0046 (0.79) �0.0043 (0.41)SIZE �0.0080 (1.16) �0.0108 (0.87)RECINV 0.0257 (2.26)** 0.1255 (2.63)***FOREIGN 0.0702 (0.62) 0.1177 (0.58)GEOSEG 0.0002 (0.56) �0.0012 (1.49)LIQ �0.0005 (1.00) �0.0014 (0.99)LEV 0.0012 (2.33)** 0.0026 (2.31)**ROA 0.0043 (0.47) 0.0087 (0.24)GCONCERN 0.0353 (0.75) 0.1394 (0.80)BIG4 �0.0170 (2.56)** �0.0374 (2.40)**LOSS 0.0201 (3.32)*** 0.0580 (2.38)**FIRMAGE 0.0001 (0.52) 0.0006 (1.20)RESTATE 0.0517 (4.89)*** 0.1420 (4.05)***RESTRUCT 0.0083 (1.62) 0.0307 (1.58)BANKRUPTCY �0.0036 (4.40)*** �0.0125 (3.73)***ABSDA 0.0420 (4.91)*** 0.0976 (4.04)***POSTSOX �0.0043 (0.35) �0.0132 (0.79)DECEMBER 0.0055 (1.43) 0.0203 (1.77)*BSIZE �0.0004 (0.03) 0.0075 (0.22)PCTOD 0.0064 (0.50) 0.0260 (0.82)CEOCHAIR �0.0064 (1.71)* �0.0231 (2.43)**BODNMEET 0.0029 (0.85) 0.0077 (0.75)CEOTENURE 0.0003 (1.44) 0.0014 (2.08)**CEOTURN 0.0272 (1.62) 0.1303 (1.21)BODTENURE �0.0004 (0.75) �0.0006 (0.47)�WWCEO 0.0790 (1.71)* 0.1590 (1.97)**�WMCEO 0.0274 (0.44) �0.0041 (0.12)�MMCEO �0.0301 (0.35) �0.0630 (0.64)�PCTWAUD �0.3337 (2.39)** �0.4179 (1.17)�PCTMAUD 0.0667 (0.77) 0.0591 (0.29)Observations 12,153 12,153R-squared 0.0657 0.0404Intercept Yes Yes
Notes: DWEAK equal to 1 if the firm has internal weakness (or COUNTWEAK is greater than zero);COUNTWEAK is the number of reported internal control weaknesses; the first regression DWEAK isa probit regression; see Table I for the remaining variable definitions; the Fama–French 48 industrydummies and year dummies are included in the regression but are not reported; robust absolute valueof t-statistics with both firm and year clustering are in parentheses; * , ** , and *** significant at 10, 5and 1%
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index (Bebchuk et al., 2009). Our results remain robust with the inclusion of thesevariables[23]. Third, we re-examine our analyses by controlling for auditor tenure or thenumber of years that a firm is audited by the current auditor. Our results are consistentwith the main results[24]. Fourth, in the regressions using corporate board data, wecheck for a potential tokenism issue of appointing both female and ethnic minoritydirectors. We include only observations with three or more female or ethnic minorityboard members. Our results remain robust. Fifth, we run our regression for thepre-Sarbanes Oxley (2000 to 2002) and post-Sarbanes Oxley (2003-2010). We find thatour results are consistent for both periods. However, the results for pre-SOX are weakerbecause the pre-SOX sub-sample has a significantly smaller sample size compared to thepost-SOX sub-sample. Because the Audit Analytics data starts in the year 2000,approximately 76.2 per cent of our observations are from the post-SOX period. Finally,we run the fixed-effect panel data regressions across firms-years and the results remainunchanged.
We perform several analyses to examine the differences in auditor characteristics (i.e.Big 4 auditor and industry specialist) across gender/ethnicity groups. We do not findevidence that firms with female or ethnic minority CEOs are more likely to hire Big 4auditors and auditors with industry specialization (Francis et al., 2005; Huang et al.,2007) than those with white male CEOs. However, we find that firms with female orethnic minority audit committee members are more likely to hire Big 4 auditors andauditors with significant industry specialization than firms with all white male auditcommittee members.
We also perform analysis to examine differences in earnings quality, measured bythe absolute value of discretionary accruals (ABSDA) across CEO and audit committeegender/ethnicity groups. We do not find any differences between CEO gender/ethnicitygroups (i.e. female white vs male white CEOs, female minority vs male white minorityCEOs and male minority vs male white CEOs). However, we find that firms with femaleor ethnic minority audit committee members have significantly lower ABSDA,indicating better earnings reporting quality than firms with all white male auditcommittee members. Female or ethnic minority audit committee members areassociated with higher audit fees and shorter audit delay because they have preferencefor greater assurance and financial reporting quality. Taken together, our resultsprovide further evidence to rule out the alternative explanation that firms with female orethnic minority CEOs and directors may have a weaker internal control system thanthose with male Caucasian CEOs and directors.
4. Conclusion, implications and limitationsThe present study examines the impact of gender and ethnic diversity in corporateleadership and boardrooms on audit fees and audit delay. In our setting, gender andethnic diversity are likely to capture differences in the level of risk tolerance,overconfidence, diligence and monitoring intensity. As a result, these individualdifferences are likely to influence financial reporting decisions reflected in audit fees andaudit delay. Using firm-level data between 2000 and 2010, we provide empiricalevidence supporting our hypotheses that CEO and director gender and ethnicity aredeterminants of audit fees and audit delay.
Our study contributes to the growing stream of studies examining the role ofdiversity in corporate leadership and boardrooms. We find that female CEOs, ethnic
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minority CEOs and ethnic minority directors (audit committee members), compared tomale Caucasian CEOs and directors (audit committee members), are associated withhigher audit fees. This is consistent with the demand-side argument of audit pricing.The proportion of female audit committee members is not associated with audit fees.However, audit committees with a female chair are associated with lower audit fees,consistent with the supply-side argument of audit pricing. Our results suggest that thegender and ethnicity of CEOs and directors could influence the demand and supplyforces of audit fees. With respect to audit delay, we find that female CEOs, compared tomale CEOs, are associated with shorter audit delay. We also find that audit committeeswith greater percentages of female and ethnic minority directors are associated withshorter delay.
Our study has several implications. First, gender and ethnic diversity in corporateleadership and boardrooms could improve audit quality and the overall financialreporting quality. Our results suggest that female and ethnic minority CEOs and ethnicminority audit committee members demand greater assurance because they tend to bemore concerned with their reputational capital than male Caucasians. Demand forgreater assurance, in turn, could decrease the likelihood of accounting errors andirregularities. In this case, our results complement prior studies documenting thepositive impact of female leadership on accruals quality (Barua et al., 2010) and thepositive impact of gender-diverse boards on the likelihood of financial restatements(Abbott et al., 2012). However, our results also suggest that the demand for greaterassurance beyond what is necessary to keep reporting risk to an acceptable level for allshareholders could create cost inefficiency. In this case, shareholders would bear theadditional, unnecessary cost of audit services attributed to the need of CEOs anddirectors to protect their reputational capital.
Second, female leadership and gender- and ethnic-diverse audit committees couldenhance the timeliness of financial and audit reporting. Our results suggest that femaleCEOs, as well as female and minority directors, are more sensitive to capital and labormarket pressures to avoid audit delay. Having a female CEO and appointing female andminority directors on audit committees will increase the likelihood that firms will issuefinancial reports more timely.
We recognize that our study has limitations. We conclude that higher fees for firmswith female and ethnic minority CEOs and greater percentage of minority directors onaudit committees represent higher demand for more rigorous external audit services.We have ruled out the alternative explanation that the higher audit fees are due tointernal control weaknesses. However, there could be other explanations for the higherfees. It is possible that female and ethnic minority CEOs and audit committees withgreater proportion of minority directors are facing price discrimination or have lowerability to negotiate with their auditors. Because we do not have direct measures for theexistence of price discrimination, as well as CEO and director negotiation skills, wecould not rule out these explanations.
This study sought to extend the stream of research on leadership and board diversityby examining the role of gender and ethnic diversity on audit fees and audit delay.Future research investigating how diversity affects other types of managerial and boarddecisions is warranted and would provide further insight as to how individual attributesinfluence firm value.
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Notes1. Using a sample of corporate boards, Gul et al. (2008) documented that boards with female directors
are associated with higher audit fees. In contrast, using a sample of audit committees, Ittonen et al.(2010) documented that firms with female audit committee chairs have lower audit fees.
2. See the speech by SEC commissioner on board diversity at www.sec.gov/news/speech/2010/spch110410laa.htm
3. In addition, female directors are also more diligent and have preference for higher level ofmonitoring intensity than male directors (Adams and Ferreira, 2009; Gul et al., 2011; Abbott et al.,2012).
4. Statement of Financial Accounting Concepts (SFAC) No. 2 discusses relevance and reliabilityas the two primary qualities that make accounting information useful for decision-making.Timeliness is an important characteristic of relevant information.
5. Hillman et al. (2002) find that greater percentage of female and ethnic minority directors holdadvanced degrees than that of white male directors. Their results suggest that females and ethnicminorities face a “glass ceiling” in corporate America. Kumar (2010) find that female analysts issuemore accurate forecasts, even when they are less experienced, suggesting that female analystshave superior abilities. He argues that the result is due to a self-selection process; female analystshave to show more competence to compete in a male-dominated industry.
6. Empirical studies on the relationship between female and ethnic minority directors and firmperformance showed mixed results, documenting either null or positive results (Erhardt et al.,2003; Miller and Triana, 2009; Carter et al., 2003, 2010).
7. There are stricter criminal penalties for wrongdoing associated with financial reporting.
8. While we argue that CEOs would naturally desire audit quality due to penalties formisreporting, CEOs who want to conceal accounting irregularities and fraudulent activitiesmay prefer low-quality audits.
9. The work group diversity literature has examined two components of diversity, surface-leveland deep-level diversity. Surface-level diversity refers to observable attributes, such asgender, ethnicity and age. Harrison et al. (1998) find that if surface-level diversity creates anegative effect, time will moderate this effect because over a period, team members willbecome more knowledgeable about one another and bypass any surface-level differences.Similarly, an audit committee setting fosters a long enough period to remediate any negativeeffect that may stem from surface-level diversity.
10. Srinivasan (2005) suggests that labor market penalties (i.e. director departure) provide themain consequences for directors for failing to perform their monitoring duties, as penaltiesfrom lawsuits and SEC actions are limited.
11. Tsui et al. (2011) is an exception. Using a sample of Hong Kong companies, Tsui et al. (2011)documented that boards with CEO and board chairman served by different individuals areassociated with lower audit fees.
12. In addition, Goh (2009) found that both committee independence and expertise are associatedwith timely remediation of internal control deficiencies.
13. Existing studies have also documented that audit delay decreases with the implementation ofinternal control monitoring technology (Masli et al., 2010) and the adoption of compensationrecovery (clawback) provisions (Chan et al., 2012).
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14. About 9.2 per cent of firms have female CEOs and 8 per cent have ethnic minority (female andmale) CEOs. Within the ethnic minority group, 5 percent of CEOs are African American, 3 percent Hispanic and 1 per cent Asian. Only one firm has a Native American CEO.
15. For sensitivity analyses, we run regressions of audit fee (LAFEE) and audit delay(LADELAY) using exactly the same set of independent variables and our main conclusionsremain unchanged.
16. We also conducted sensitivity test by controlling for high-tech and financial industries(Ettredge et al., 2006), and our results remain robust with high-tech and financial industriescontrol variables.
17. Because the dependent variable is the natural logarithmic of audit fee (stated in milliondollars), slope coefficient of 0.06 is equal to 1.06 (exponential of 0.06). The rest of slopecoefficients for audit fee regression are interpreted in the same method.
18. We also examine the other group comparisons by comparing the related coefficients:WWCEO vs WMCEO; WWCEO vs MMCEO; and WMCEO vs MMCEO. We find that thecoefficient of WMCEO (woman minority CEO) is significantly larger than that of WWCEO(white woman CEO), statistically significant at the 10 per cent level. However, we do notobserve any significant difference in the other two group comparisons (i.e. WWCEO vsMMCEO, WMCEO vs MMCEO). Our results do not suggest a significant interaction betweenCEO gender and CEO ethnicity.
19. The dependent variable is the natural logarithmic of audit delay (stated in days), slopecoefficient of �0.05 is equal to one day (exponential of 0.05). The rest of slope coefficients foraudit delay regression are interpreted in the same method. While a one day reduction in delayseems to be economically insignificant, it is meaningful because more than 26 per cent of oursample firms have audit delay more than 60 days. After the passage of Section 404 of SOX, theaudit delay is limited to a maximum of 60 days for large accelerated filers with market valueof more than $700 million and a maximum of 75 days for accelerated filers with market valuebetween $75 million and $700 million. We run the regression analysis separately by marketvalue and find that the coefficient of WWCEO is negative and statistically significant for onlythe sample of firms with more than $700 million in market value of equity.
20. We adapted the first-stage regression model from Srinidhi et al. (2011). We replace thepercentage of female employees in each two-digit SIC industry category with the percentageof white female employment to total employment (INDWFPCT), ethnic minority femaleemployees to total employees (INDWMPCT) and ethnic minority male employees to totalemployees (INDMMPCT) for the probit models of white female CEOs, ethnic minority femaleCEOs and ethnic minority male CEOs, respectively. For the tobit regressions, we use thepercentage of female employees (INDWPCT) and ethnic minority employees (INDMPCT).The percentage data are collected from the Bureau of Labor and Statistics (BLS) CurrentPopulation Survey, available at www.bls.gov/cps/tables.htm We conduct extrapolations forthe years that are not available in BLS.
21. Inverse Mills ratio (�) is calculated from the normal density of predicted values of thedependent variable divided by the cumulative probability of the predicted values of thedependent variable (Greene, 2011).
22. Another explanation for the shorter audit delay is that the client demands for low qualityaudit (i.e. leaving unaddressed problems). This explanation is unlikely to explain our auditdelay result because we find that female CEOs are associated with higher audit fees. In
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addition, this explanation will require that the auditor agrees to accept a higher audit risk fornot detecting errors and irregularities.
23. Our untabulated results indicate that both GINDEX and entrenchment index do notsignificantly affect audit fee and audit delay.
24. We find that longer auditor tenure is associated with lower audit fees.
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Further readingFeng, M., Li, C. and McVay, S. (2009), “Internal control and management guidance”, Journal of
Accounting and Economics, Vol. 48 Nos 2/3, pp. 190-209.
About the authorsMaretno Agus Harjoto received his PhD in economics from the University of Kentucky in 2002. DrHarjoto received the 2009 Moskowitz Prize Award from the Center for Responsible Business,University of California Berkeley for his research on the Economics and Politics of Corporate
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Social Performance. He also received the 2010 and 2012 Rothschild Research award and the2011-2012 Julian Virtue Professorship from the Graziadio School of Business and Management.He was awarded the Howard A. White Category 2 teaching award in 2011. He has published over20 refereed research papers in both academic and practitioner journals, such as FinancialManagement, Journal of Financial Research, Journal of Corporate Finance, Financial Review,Journal of Business Ethics, Business Ethics: The European Review, Asia-Pacific Journal ofFinancial Studies, Journal of Financial Education and Commercial Lending Review. His work onwhisper number received media coverage by Business Week and CFO Online magazines.
Indrarini Laksmana received her PhD from Georgia State University in 2004. Her researchinterests focus on examining accounting-related managerial decisions and their relationship withexecutive compensation, corporate governance and earnings quality. Her research has beenpublished in Contemporary Accounting Research, Journal of Accounting and Public Policy, Journalof Business Ethics, Advances in Accounting and Review of Quantitative Finance and Accounting,among others. She received the Best Paper Award from the Ohio Region of the AmericanAccounting Association in 2005. She is a twice recipient of the Beta Alpha Psi and AccountingAssociation’s Professor of the Year Award, in 2009 and 2012. She is the 2013 recipient of theCollege of Business Administration’s Paul L. Pfeiffer Professional and Creative Teaching Award.She worked in public accounting before pursuing her graduate degrees and is a Certified PublicAccountant (CPA). Indrarini Laksmana is the corresponding author and can be contacted at:[email protected]
Robert Lee is an Assistant Professor of accounting at Pepperdine University’s GraziadioSchool of Business and Management. Prior to his doctoral studies, Dr Lee worked as a SeniorAuditor in public accounting and is currently licensed as a certified public accountant. He holds aPhD from Drexel University, a Master’s degree in accountancy from Villanova University and aBachelor’s degree of arts in economics and mathematics from University of Michigan. Hisresearch focuses on examining the judgment and decision-making process in accounting andauditing contexts. His dissertation was awarded the doctoral student grant from the IMAResearch Foundation. He is a member of the American Accounting Association and the Instituteof Management Accountants and has won various teaching awards.
For instructions on how to order reprints of this article, please visit our website:www.emeraldgrouppublishing.com/licensing/reprints.htmOr contact us for further details: [email protected]
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1. Yu Chen, John Daniel Eshleman, Jared S. Soileau. 2016. Board Gender Diversity and InternalControl Weaknesses. Advances in Accounting 33, 11-19. [CrossRef]
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