The Relation between Managerial Ability and Audit Fees and Going Concern Opinions

While prior research has examined the relation between firm-level attributes and auditors' decisions, there is little empirical evidence on whether managerial attributes are informative to auditors. We examine the relation between managerial ability, i.e., ability in transforming corporate resources to revenues, and audit fees and a going concern opinion. We use the managerial ability measure recently developed by Demerjian, Lev, and McVay (2012). We find that incremental to firm-level attributes, both audit fees and the likelihood of issuing a going concern opinion are decreasing in managerial ability. Collectively, our findings support the notion that managerial ability is relevant to auditors' decisions.