Busy CEOs and audit fees: evidence from Indonesia

A company needs to use auditing procedures to ensure the reliability of financial statements while also providing transparency to stakeholders. The extent of risk associated with the company depends on the directors’ involvement in its daily operations. This paper aims to study the relationship between busy chief executive officers (CEOs) and audit fees.

This study uses 1,037 data samples from companies listed on the Indonesia Stock Exchange from 2010 until 2018. It adopts the ordinary least squares method to test the hypothesis. Furthermore, this study performs robustness tests, such as propensity score matching (PSM) and Heckman’s two-stage least square tests (Heckman, 1979), to address the endogeneity issues.

This study finds that the appearance of a busy CEO in a company will significantly increase the audit fee. It also concludes that a long tenure of a busy CEO will substantially weaken the positive relationship between the CEO and the audit fee. However, this study discovers that, in a company with a busy CEO, a monitoring mechanism through the independent commissioner and risk management committee will only help to maximize the firm’s practical risk evaluation a little. This result is robust because the PSM and Heckman tests display consistent results, so it is free from endogeneity issues.

This study is valuable for theoretical and practical development in Indonesia. Due to the minimum regulation about multiple positions on boards in Indonesia, the shareholders must be aware of the need to choose a board with more skill and commitment to improve the position of the company. This result also warns the C-level of the company to pay more attention to its risk-monitoring process to make it more effective and efficient.

Indonesia is one of the countries that have implemented the two-tier governance system. With the minimum regulation about multiple directorships in Indonesia, this study offers new insights into how a busy CEO will be related to the audit outcomes.