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Paper Information

Journal:   JOURNAL OF ACCOUNTING KNOWLEDGE AND MANAGEMENT AUDITING   fall 2016 , Volume 5 , Number 19 ; Page(s) 129 To 138.

Effect of Managerial Overconfidence on Audit fee with emphasis on Audit fee Role

Author(s):  SEPASI SAHAR*, Asadi Vasfi Mahdi
* Faculty of Management & Economics, Tarbiat Modares University
We investigate the association between managerial overconfidence and audit fees, as well as the effect of a strong audit committee on this relation. Overconfident managers tend to overestimate their ability and the future payouts of projects but underestimate the likelihood and impact of adverse events. Auditors may therefore charge a fee premium to compensate for the additional audit effort due to the increased audit risk. Conversely, overconfident managers may demand less audit services due to either hubris in their companies’ financial reporting or a desire to reduce auditor scrutiny over aggressive accounting. A strong audit committee can alleviate the audit risks associated with managerial overconfidence or prevent overconfident managers from reducing audit services thus mitigating the relation between audit fees and managerial overconfidence. We survey 73 companies in Stock Exchange in the year’ s 1384 to 1393 find that a negative relation is between managerial overconfidence and audit fees. In addition, a strong audit committee also can’ t reduce this negative effect.
Keyword(s): Overconfidence,Audit fees,Audit Committee
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