Do Chief Audit Executives Matter? Evidence from Turnover Events

Abstract

We investigate the chief audit executive’s (CAE) internal audit supervisory role by examining the change in internal audit monitoring effectiveness following the turnover of CAEs. Using a sample of firms listed on the small and medium enterprise board of China’s stock exchange, we find that CAE turnover is accompanied by a reduction in financial reporting/internal control quality and that the reduction is more pronounced for firms whose successor CAEs have lower financial expertise than their predecessors. Further analysis shows that the negative association with financial reporting/internal control quality is stronger when the turnover is for personal reasons than when it is for internal transfer of the CAE. These findings are robust to a battery of sensitivity checks, including placebo tests and matching diagnostics. Our results highlight the importance of the CAE for a firm’s internal audit functions.