Connected at the Top: CEO–Executive Social Ties and Audit Pricing

This study examines whether social ties within top management teams are associated with audit pricing. Drawing on research on organizational social networks and auditor risk assessment, I investigate whether connections between chief executive officers and other top executives are reflected in auditors’ pricing. Using 22,220 S&P 1500 firm-year observations from 2002 to 2014, I find that CEO–executive connections are negatively associated with audit fees. The findings are consistent with connected executive teams being associated with lower audit risk or client business risk, or with auditors treating such teams as lower-risk clients. The negative association between CEO–executive connections and audit fees is weaker among firms facing higher litigation risk, suggesting that auditors’ pricing responses to organizational social structure are constrained when professional and legal risks are salient. In contrast, the negative association is stronger when auditors have longer tenure and when auditors are industry specialists, consistent with auditors being more likely to incorporate CEO–executive connections into audit pricing when they have greater client-specific or industry-specific knowledge. Additional analysis indicates that the negative association is more consistently observed for advice-based ties than for friendship-based ties, consistent with the view that work-related social ties facilitate information sharing, communication, and coordination within the top management team. Overall, the study contributes to the audit pricing and auditor risk-assessment literature by providing archival evidence that informal organizational ties within the client’s top management team are associated with audit pricing outcomes.