Audit Lag

Journal of International Accounting, Auditing and Taxation xxx (xxxx) xxx
Contents lists available at ScienceDirect
Journal of International Accounting,

Auditing and Taxation
CEO succession origin, audit report lag, and audit fees: Evidence
from Iran
Javad Oradi
Faculty of Economics and Administrative Sciences, Ferdowsi University of Mashhad, Mashhad, Iran
a r t i c l e i n f o a b s t r a c t
Article history: This study examines whether chief executive officer (CEO) succession origin (hiring an insi-
Available online xxxx der CEO versus an outsider CEO) is associated with audit report lag (ARL) and audit fees in
the Iranian setting, which is characterized by less-developed corporate governance mech-
Keywords: anisms and a constrained audit market. Using a sample of firms listed on the Tehran Stock
CEO succession origin Exchange between 2007 and 2017 and three proxies for ARL, I find that audit report delay is
Audit report lag longer if the CEO is promoted from within the firm. Furthermore, audit fees are higher for
Audit fees
firms promoting an insider to the CEO position than for firms hiring outsider CEOs. Further
Audit effort
Iran
analyses show that the positive effects of insider CEOs on ARL and audit fees are more pro-
nounced when firms are audited by private audit firms. The results remain robust after
controlling for firm-level fixed effects, addressing endogeneity issue, and running several
sensitivity tests. This study contributes to the literature by providing new empirical evi-
dence concerning the effect of CEO succession origin on corporate audit outcomes in an
emerging economy setting. The findings of this study suggest that the implications of
CEO succession origin for auditors can differ between emerging and developed economies.
Ó 2021 Elsevier Inc. All rights reserved.
1. Introduction
Audit report lag1 (ARL) and audit fees have been considered in prior research as the proxies for audit risk and audit effort
(e.g., Bamber, Bamber, & Schoderbek, 1993; Bentley, Omer, & Sharp, 2013; Hay, Knechel, & Wong, 2006; Knechel & Payne, 2001).
Previous studies extensively examined the determinants of ARL and audit fees, such as firm and auditor-specific characteristics,
corporate governance structure, and managerial characteristics, particularly gender, tenure, financial experience, and ability
(Abernathy, Kubick, & Masli, 2018; Baatwah, Salleh, & Ahmad, 2015; Harjoto, Laksmana, & Lee, 2015; Kalelkar & Khan, 2016;
Krishnan & Wang, 2015; Mitra, Song, Lee, & Kwon, 2020). However, despite the significant role of top managers in financial
reporting and audit process (Bamber, John, & Wang, 2010; Bills, Lisic, & Seidel, 2016; Brockman et al., 2019a), especially in
emerging markets, the topic of chief executive officer (CEO) succession origin (hiring an insider CEO versus an outsider CEO)
remains relatively under-researched in auditing literature. Although CEOs are not directly involved in the preparation of finan-
cial reports, they set the tone at the top and influence the decisions impacting the chief financial officer (CFO)’s career and the
annual audit planning process (Brockman et al., 2019a).
E-mail address: ja_oradi@mail.um.ac.ir

1
ARL is the number of days from a client’s fiscal year-end to the date of its auditor’s report (Newton & Ashton, 1989). Prior literature suggests that long audit
delays reduce financial information quality (e.g., Newton & Ashton, 1989; Knechel & Payne, 2001), increase information asymmetry (e.g., Bushman & Smith,
2001; Ettredge, Li, & Sun, 2006), and impair the audit efficiency (e.g., Bamber et al., 1993; Knechel & Payne, 2001).
https://doi.org/10.1016/j.intaccaudtax.2021.100414
1061-9518/Ó 2021 Elsevier Inc. All rights reserved.
Please cite this article as: J. Oradi, CEO succession origin, audit report lag, and audit fees: Evidence from Iran, Journal of International
Accounting, Auditing and Taxation, https://doi.org/10.1016/j.intaccaudtax.2021.100414
J. Oradi Journal of International Accounting, Auditing and Taxation xxx (xxxx) xxx
The purpose of this study is to examine whether CEO succession origin is associated with ARL and audit fees in an emerg-
ing economy setting, using the case of Iran. Iran’s institutional characteristics provide a unique setting for this study. Similar
to many other emerging economies, the Iranian corporate environment is characterized by high ownership concentration,
less-developed corporate governance mechanisms, and relatively poor legal enforcement. Furthermore, in Iran, the interna-
tional accounting firms (including Big 4 and non-Big 4 firms) are not allowed to operate, and top managers have relatively
wider discretion over financial reporting decisions owing to poor supervisory mechanisms (Hesarzadeh, Bazrafshan, &
Rajabalizadeh, 2020; Oradi, Asiaei, & Rezaee, 2020).
To the best of my knowledge, this is the first study to examine the relationship between CEO succession origin and ARL.
Most recently, Brockman et al. (2019a) examine the implications of CEO succession origin for audit pricing in U.S. Standard
and Poors (S&P) 1500 firms. They find that audit fees are lower when a CEO is hired from within the organization. However,
the relationship between CEO succession origin and audit fees in the context of emerging economies remains unexplored.
The extant literature provides different perspectives on how CEO succession origin is related to audit delay and audit fees.
On the one hand, insider CEOs are well-aware of the firms’ products, production chain, operations, and business situation,
and thus, they can perform the monitoring function more thoroughly (Liu, 2020). Brockman et al. (2019a) state that the
firm-specific knowledge may broaden the CEO’s understanding of how financial statements reflect firm performance, includ-
ing the selection of accounting policies and the provision of key accounting estimates. Thus, firm-specific knowledge of CEO
can reduce the risk of misstatement in financial statements. Moreover, the relationship between the CEO and the auditor,
which is built over time, enables the auditor to gauge the practices or management style of the CEO, including the CEO’s
desire and incentives for aggressive financial reporting (Brockman et al., 2019b). Therefore, audit risk and, subsequently,
audit effort may be reduced with insider CEOs, raising the prospect that they are associated with shorter ARL and lower audit
fees.
On the other hand, insider CEOs know where all the bodies are buried. The firm-specific knowledge enables insider CEOs
to gain more power over the firm’s operational strategies, which may increase CEO entrenchment (Hsieh, Chen, Tseng, & Lin,
2018). In addition, the firm-specific knowledge can help CEOs manage earnings or commit fraud because CEOs with firm-
specific knowledge have more information about the firm and are more familiar with auditors, previous audit techniques,
and audit processes (Brockman et al., 2019b). Hence, audit risk can be increased with insider CEOs, leading to more audit
effort, and subsequently longer ARL and higher audit fees.
Furthermore, recruiting outsider CEOs can be as a solution for organizational problems, such as poor performance
(Quigley, Hambrick, Misangyi, & Rizzi, 2019), because outsider CEOs are highly versatile (Kaplan & Minton, 2012). This char-
acteristic enables them to develop new ideas and solutions (Karaevli, 2007). However, placing a greater emphasis on short-
term performance may also lead to an increase in earnings management (Kuang, Qin, & Wielhouwer, 2014). Moreover, audi-
tors may prioritize firms with outsider CEOs due to the higher risk that a new CEO will have different auditor preferences. In
summary, the impact of CEO succession origin on audit delay and audit fees can be either positive or negative.
Data are derived from listed companies on the Tehran Stock Exchange (TSE) during the period 2007 to 2017. CEO succes-
sion origin is a dummy variable that equals one if the CEO is hired from inside the firm, and zero otherwise. Using various
proxies, I document that CEO succession origin is associated with ARL. Specifically, I find that the ARL is longer if the CEO is
promoted from inside the firm. Moreover, I find that audit fees are higher for firms promoting an insider to the CEO position
than for firms hiring outsider CEOs. These findings are robust after controlling for firm-level fixed effects and endogeneity
issues.
In addition, I estimated the research models by using a sample of firms that experienced CEO turnover to control for man-
ager fixed effects because both CEOs and firm characteristics could change over the sample period. The findings indicate that
insider CEOs are positively associated with ARL and audit fees. Additionally, the results remained unchanged after using the
ARL change regression and controlling for audit committee characteristics. Finally, I investigate whether the positive asso-
ciation between insider CEOs with ARL and audit fees are affected by audit firm type (private versus state). I find that these
relationships are more pronounced when firms are audited by private audit firms.
This study directly contributes to both the audit literature and the CEO succession literature by indicating that CEO suc-
cession origin provides incremental information about audit outcomes in an emerging economy context. Auditor effort can
improve audit quality, enhance financial statement reliability and, thus, influence investors’ decision-making. Therefore, it is
important to uncover the factors determining ARL and audit fees as output measures of audit effort. The findings of this study
reveal that Iranian auditors assess higher audit risk and, thus, charge higher audit fees when facing CEOs recruited from
within the firm. This finding is inconsistent with previous studies (Brockman et al., 2019a), suggesting that the implications
of CEO succession origin for auditors can differ between emerging and developed economies. In the context of Iran, where
monitoring mechanisms are relatively weak (Hesarzadeh et al., 2020), firm-specific knowledge may facilitate opportunistic
behavior and the pursuit of personal gains by insider CEOs, which consequently leads to more audit effort. The findings
should interest auditors in Iran and other emerging economies, and assist them in client screening, audit planning, and
the determination of audit workload. The findings also help to enrich our understanding of how top management’s individ-
ual characteristics influence auditors’ decisions, particularly in emerging economies.
The remainder of the paper is organized as follows. Section 2 discusses the characteristics of the Iranian business envi-
ronment. Section 3 reviews the literature on CEO succession origin and then develops the research hypotheses. Section 4
describes the research methodology, and Section 5 reports the results of the main and supplementary tests. Finally, Section 6
concludes the paper.
2
2. Institutional background
Iran is a developing country in the Middle East and North Africa (MENA) region. Over the past several decades, Iran’s
economy was based on oil. However, recently Iran has taken the steps towards economic diversification by emphasizing
non-oil activities, including human resources and financial markets (Hesarzadeh & Rajabalizadeh, 2019; Mashayekhi &
Bazaz, 2008). In 1968, Iran constituted the TSE as a key step towards building the foundation of its financial sector. The
TSE comprises more than 300 listed companies that have a rather highly concentrated ownership structure (Asiaei, &
Jusoh, 2017; Hesarzadeh & Bazrafshan, 2019; Asiaei, Rezaee, Bontis, Barani, & Sapiei, 2021). Iran’s regulatory frameworks
are similar to those of Western countries in terms of financial reporting timeliness. Iranian companies must disclose audited
annual and quarterly reports within four months and one month, respectively, after the close of the period. If a company
misses its deadline, then it will face financial penalties. Other ways of presenting information, such as media releases, con-
ferences, and financial analyses, are not well developed and so users lack good alternative sources of accounting information;
thus, investors and shareholders in Iran desire timely financial reports (Mirshekary & Saudagaran, 2005). In other words, the
accounting information disclosed in annual reports is the only reliable source of existing information in Iranian capital mar-
ket (Moradi & Pour Hosseini, 2009).
The Iranian audit market is constrained (see Azizkhani, Daghani, & Shailer, 2018) with no international audit firms oper-
ates, and the absence of an appropriate domestic alternative has negatively affected Iran’s audit profession (Bagherpour,
Monroe, & Shailer, 2014). Prior to 2001, the Iranian Audit Organization, a governmental audit firm, governed Iran’s audit
market. After 2001 and with the creation of the Certified Public Accountants community, private audit firms were allowed
to operate. This led to the establishment of a huge number of private audit firms, which quickly undermined the dominance
of the Iranian Audit Organization over the audit market (Azizkhani et al., 2018). Also, litigation risk in Iran is significantly
lower than in the other countries, such as the U.S. (Bagherpour et al., 2014). Consequently, while litigation is not usually
regarded as an important and effective mechanism for ensuring financial reporting quality, other mechanisms, such as exec-
utives’ characteristics are of greater importance in obtaining assurance about the quality of disclosed financial information.
More importantly, corporate governance in Iran is similar to large developing capital markets, such as China, India, and
Russia, and has often been criticized for weak mechanisms (Bagherpour et al., 2014; Oradi & Izadi, 2019). As an alternative
mechanism, Iranian companies’ top managers considerably influence the companies’ reporting process (Oradi et al., 2020).
Top managers of Iranian listed companies face fewer limitations in comparison with their counterparts in countries with
mature labor markets for managers and effective corporate mechanisms. Therefore, they can influence financial reporting
more significantly because they have greater freedom and perform in accordance with their attributes and preferences.
Accordingly, recent empirical studies in Iran show the significant role of CEOs’ characteristics in corporate outcomes (e.g.,
Hesarzadeh & Bazrafshan, 2019; Oradi et al., 2020). Altogether, the Iranian setting provides an excellent opportunity to
examine whether CEO succession origin, as an important CEO characteristic, influences corporate audit outcomes.
3. Literature review and hypotheses development
3.1. CEO succession origin
Prior research relying on upper echelons theory (Hambrick & Mason, 1984) suggests that strategic choices and organiza-
tional outcomes are affected by the demographic characteristics of CEOs (e.g., Bamber et al., 2010; Bergstresser & Philippon,
2006; Bertrand & Schoar, 2003; Dyreng, Hanlon, & Maydew, 2010). According to the upper echelons theory, the leadership of
an organization is of major strategic significance, and the CEO has the central role in adapting the organization’s strategic
orientation to its changing environment (Hambrick, 2007). Bills et al. (2016) argue that leadership transition is an event
of crucial importance to a firm, and CEO succession planning is a fundamental component of a firm’s strategy.
As CEO succession is particularly important to a firm’s strategy and successor, the board of directors is responsible for
selecting the most competent candidate and ensuring a smooth leadership transition (Biggs, 2004). Jongjaroenkamol and
Laux (2017) predict that a weak reporting system developed by the governance structure increases the likelihood that boards
hire insider CEOs. However, over the past three decades, recruiting CEOs from outside the firm has become increasingly
prevalent worldwide (Kaplan & Minton, 2012), particularly in Asian countries, such as China, Japan, and Korea (Liu, 2020),
and Iran (Rezaee, Asiaei, & Safdel, 2021).
The theoretical literature on CEO succession mainly concentrates on the adaptation benefits and disruption costs arising
from CEO succession. Based on resource dependence theory, replacing top managers with outsider CEOs can be a solution to
the problems encountered by firms, such as weak performance and a lack of required flexibility in the face of changing envi-
ronmental demands (Karaevli, 2007). CEOs hired from outside provide new strategic views and establish new ties with the
environment (Zhang & Rajagopalan, 2004). Additionally, long-tenured executives are reluctant to make the required changes
in their firms because they are psychologically committed to the present situation and have deep-rooted social relationships
within firms (Wiersema & Bantel, 1993). Karaevli (2007) states that due to socialization processes within firms, long-tenured
executives are more likely to take narrow viewpoints, show psychological commitment to the present situation, and have
information processing that is smaller in amount and lower in quality.
3
In contrast, the ‘‘continuity” perspective of successions holds that succession primarily aims to ensure the continuity of
leadership in the organization. The ‘‘continuity” perspective concentrates on internal succession, emphasizing the signifi-
cance of insiders’ broader knowledge of the firm and the formed networks aimed at maintaining continuity (Lauterbach,
Vu, & Weisberg, 1999). As insider CEOs have worked in the firm for a rather long time, they feel firmly committed to the
firm, suggesting that the firm’s sustainable development and reputation are of more importance to them. As a result, a fine
reputation is built as a result of the greater importance attached by insider CEOs to such issues, compared to outsider CEOs
who are not committed to the firm and prioritize their own income and position (Liu, 2020).
Extensive literature in strategic management analyzes the consequences of CEO succession origin (e.g., Miller, 1993;
Quigley et al., 2019; Zhang & Rajagopalan, 2004, 2010). Most of these studies investigate the impact of CEO succession origin
on firm performance with mixed results. Meta-analysis done by Schepker, Kim, Patel, Thatcher, and Campion (2017) shows
that insider CEOs deliver better performance in the long term because they enable adaptation to environmental changes and
utilize their relationships with internal stakeholders to adopt appropriate changes. Brockman et al. (2019a) find that insider
CEOs are more likely to issue voluntary earnings forecasts. However, studies investigating the impact of CEO succession ori-
gin on the firm’s auditors are limited.
3.2. Hypotheses development
The probable effect of CEO succession origin on audit effort can be reviewed from two important aspects: a) having firm-
specific knowledge and b) the interaction between the CEO and their auditor. First, insider CEOs have sufficient information
about the firm’s activities, including products, production chain, operations, business situation, and firm culture, whereas
outsider CEOs lack such information (Liu, 2020). The CEO is ultimate responsible for monitoring accounting records and poli-
cies (Baatwah et al., 2015). An outsider CEO is expected to have insufficient knowledge about these processes. This may lead
to higher audit risk as more numerous accounting errors and required adjustments are expected. However, the information
asymmetry between insider candidates and the board is lower; suggesting that the board would monitor CEOs hired from
within the firm less carefully (Karaevli & Zajac, 2013). As a result, inside CEOs can manage earnings through the opportunis-
tic use of firm-specific knowledge (Brockman et al., 2019a). Therefore, an insider CEO may be associated with an increase in
audit risk, leading to more audit effort, longer ARL, and higher audit fees.
Second, as financial reporting is an outcome of the interaction between the external auditors and the management, it is
expected that auditors respond to CEO succession origin. Hiring a CEO from inside the organization can reduce organiza-
tional uncertainty because all stakeholders, including auditors, require time to become familiar with the new CEO (Zhang
& Rajagopalan, 2004). Brockman et al. (2019a) argue that the familiarity between auditors and insider CEOs affects audit risk.
On the one hand, the relationship auditors developed with CEOs over time enables them to better gauge the practices and
management style of CEOs, including their desire and incentives to employ aggressive financial reporting. Accordingly, insi-
der CEOs reduce audit risk and audit effort. On the other hand, the CEO’s past work experience in the firm can be associated
with the auditor’s increased familiarity with the CEO, resulting in more CEO opportunism and the impaired auditor’s inde-
pendence (Brockman et al., 2019a). Overall, these contradictory predictions suggest that CEO succession origin could nega-
tively or positively related to audit effort; in this study, ARL and audit fees. Therefore, the research hypotheses are expressed
as follows (in the alternative form):
H1. There is a significant relationship between CEO succession origin and audit report delay.
H2. There is a significant relationship between CEO succession origin and audit fees.
4. Research design
4.1. Data and sample
Data of TSE-listed companies for the period 2007 to 2017 are obtained from several resources. Audit-related data as well
as data on CEOs, boards of directors, ownership structure, firm age, foreign sales, subsidiaries, and restatements are manually
extracted from audit reports, and financial statements and their notes provided on the comprehensive database of the Secu-
rities and Exchange Organization of Iran (CODAL2). The financial data are also obtained using the CODAL database and
Rahavard-e-Novin software, which is the most comprehensive database of the Iranian capital market (Oradi & Izadi, 2019).
For missing data, such as data about CEO succession origin, keywords were used to searched through Google to find the required
information.
The research sample is selected as follows. Similar to other research (e.g., Sultana, Harjinder, & Van der Zahn, 2015),
delisted firms and firms in the financial services industry as well as firms with missing data, such as information related
to CEOs, are excluded. After excluding delisted firms, observations of financial services institutions, and firms with missing
data, the final research sample to test H1 consists of 1,727 firm-year observations. The disclosure of audit fees is not manda-
tory in Iran (Oradi et al., 2020); thus, only voluntarily disclosed audit fees are accessible. Accordingly, the relationship
2
www.Codal.ir
4
between CEO succession origin and audit fees (H2) is tested using a smaller sample of 1,002 firm-year observations. Table 1
presents the procedure for selecting the sample.
4.2. H1: ARL model
To test the first hypothesis, the following ordinary least squares (OLS) regression model is estimated based on prior ARL
research (Abernathy et al., 2018; Baatwah et al., 2015; Bamber et al., 1993; Chan, Luo, & Mo, 2016; Knechel & Sharma, 2012;
MohammadRezaei & Mohd-Saleh, 2018; Sultana et al., 2015):
ARLit ¼ a0 þ a1 CEOINSIDERit þ a2 CEOTENit þ a3 SIZEit þ a4 LEVit þ a5 ROAit þ a6 LOSSit þ a7 RECINVit þ a8 CURRit
þ a9 MBVit þ a10 ACCRUALSit þ a11 LNAGEit þ a12 FOREIGNit þ a13 SUBSit þ a14 RESTATEit þ a15 BUSYit
þ a16 GCOit þ a17 AUDPVTit þ a18 OPINIONit þ a19 AUDITCHANGEit þ a20 B SIZEit þ a21 B INDit
þ a22 CONOWNit þ a23 INSTOWNit þ YEAR FE þ IND FE þ eit ð1Þ
This study uses three proxies to measure audit delays: (1) the number of days between the fiscal year-end date and the
audit report signature date (ARL) (e.g., Bamber et al., 1993; Newton & Ashton, 1989); (2) the natural logarithm of ARL (LNARL)
is used to control for the impact of outliers and nonlinearity in ARL, and it provides the results with more certainty3 (Jaggi &
Tsui, 1999); and (3) the industry-adjusted ARL (IAARL). The third measure is used rather than industry dummy variables to con-
trol for the impact of industry on ARL, and it is calculated by subtracting the industry median of ARL from the firm’s ARL4
(Baatwah et al., 2015; Mande & Son, 2011).
The test variable is CEO succession origin. An insider CEO is defined as one who has worked at a firm for at least 1 year
before promotion to CEO. In contrast, outsider CEOs are those who have worked at a firm for less than a year before they are
appointed as CEO (Huson, Malatesta, & Parrino, 2004). CEO succession origin is defined by using a dummy variable CEOIN-
SIDER that equals 1 if the CEO is hired from inside the firm, and zero otherwise.
CEO tenure at the firm (CEOTEN) is controlled in the ARL model because this variable indicates the CEO’s experience after
appointment as CEO (Brockman et al., 2019). Prior research demonstrates that long-tenured CEOs are associated with weak
firm performance (e.g., Bizjak, Lemmon, & Naveen, 2008) and internal control weaknesses (Lin, Wang, Chiou, & Huang, 2014).
Following the research on ARL, firm size, firm risk, and firm complexity are expected to impact ARL (Abernathy et al., 2018;
Baatwah et al., 2015; Chan et al., 2016; Knechel & Sharma, 2012;; MohammadRezaei & Mohd-Saleh, 2018; Sultana et al.,
2015). Firm size is controlled by the natural logarithm of total assets (SIZE). Firm risk is controlled by leverage (LEV), return
on assets (ROA), loss indicator (LOSS), market value to book value (MBV), total accruals (ACCRUALS), client’s age (LNAGE),
restated financial statements (RESTATE), and going-concern opinion (GCO). Firm complexity is controlled by including the
ratio of receivables and inventory to total assets (RECINV), the current ratio (CURR), foreign operations (FOREIGN), and client’s
subsidiaries (SUBS) in the regression. Moreover, firm fiscal year-end is controlled for because ARL is expected to be longer for
clients with a fiscal-year-end during the auditors’ busy season5 (BUSY). Auditor-specific characteristics, such as auditor type
(private versus state, AUDPVT), audit opinion (OPINION), and auditor change (AUDITCHANGE), are also controlled for following
MohammadRezaei and Mohd-Saleh (2018).
Finally, I control for firms’ corporate governance factors and ownership structure, including board size (B_SIZE), board
independence (B_IND), ownership concentration (CONOWN), and institutional ownership (INSTOWN). Year and industry fixed
effects are included in all models to control for variation across industries or over time. The Appendix A provides variable
definitions.
4.3. H2: Audit fee model
Following prior research (e.g., Chaney, Jeter, & Shivakumar, 2004; Hay et al., 2006; Ho & Kang, 2013; Sharma, Tanyi, & Litt,
2017; MohammadRezaei, Mohd-Saleh, & Ahmed, 2018), the following OLS regression model is estimated to test the second
hypothesis:
LNFEEit ¼ a0 þ a1 CEOINSIDERit þ a2 CEOTENit þ a3 SIZEit þ a4 ATURN þ a5 LEVit þ a6 ROAit þ a7 LOSSit
þ a8 RECINVit þ a9 CURRit þ a10 MBVit a11 ACCRUALSit þ a12 ZSCORE þ a13 ISSUE þ a14 LNAGEit
þ a15 FOREIGNit þ a16 SUBSit þ a17 R&D þ a18 RESTATEit þ a19 BUSYit þ a20 GCOit þ a21 AUDPVTit
þ a22 OPINIONit þ a23 AUDITCHANGEit þ a24 B SIZEit þ a25 B INDit þ a26 CONOWNit þ a27 INSTOWNit
þ YEAR FE þ IND FE þ eit ð2Þ
3
Thus, LNARL is used in sensitivity analyses as a proxy for audit delay.
4
Industry dummy variables are not included in this model because the industry-adjusted ARL model controls for the industry effect.
5
The fiscal year of most TSE-listed companies follows the Iranian calendar year, which means their fiscal year ends around March 20.
5
Table 1
Sample selection and industry breakdown.
Panel A: Sample selection procedure

Description Observations
Firm-year observations between 2007 and 2017 3,575
Less: Firms not in operation for entire period 253
Less: Financial services industries 649
Less: Missing data, such as CEO succession origin and control variables 946
Final sample for test H1 1,727
Less: Missing audit fees 725
Final sample for test H2 1,002
Panel B: Sample firm break down by industry
Model 1 (H1) Model 2 (H2)

Industry Number % Number %
Basic metals 164 9.50 86 8.58
Car and parts manufacturing 275 15.92 130 12.97
Cement 197 11.41 55 5.49
Chemical products 153 8.86 101 10.08
Drug 209 12.10 132 13.17
Food 187 10.83 135 13.47
Machinery 88 5.10 35 3.50
Metallic minerals 55 3.18 49 4.89
Metal products 55 3.19 41 4.10
Non-metallic minerals 98 5.67 73 7.29
Sugar 77 4.46 33 3.29
Tile 70 4.05 52 5.19
Others 99 5.73 80 7.98
Total 1,727 100.00 1,002 100.00
Similar to the research on audit fees (e.g., Chaney et al., 2004; Hay et al., 2006; Ho & Kang, 2013; MohammadRezaei et al.,
2018), this study uses the natural log of audit fees paid to auditors (LNFEE). As in model 1, the test variable is CEO succession
origin, CEOINSIDER. Following prior research (Chaney et al., 2004; Hay et al., 2006; Ho & Kang, 2013; MohammadRezaei et al.,
2018; Sharma et al., 2017), I control for numerous other effects on audit fees. Most of these control variables were already
defined in section 4.2. Based on prior research, several additional control variables are added when testing H2. To control for
firm risk, I include the asset turnover (ATURN), financial health score (ZSCORE), equity issues (ISSUE), and research and devel-
opment (R&D) expenses. The Appendix A provides the definitions of all variables.
5. Empirical results
5.1. Descriptive statistics
Table 2 provides descriptive statistics for my samples of firms. Panel A of Table 2 presents the summary statistics for the
variables used in the ARL model (n = 1727). Panel B of Table 2 presents summary statistics for the variables used in the audit
fee model (n = 1002). All the variables are winsorized at the 1% and 99% levels to reduce the effect of outliers. The mean
(median) of ARL value of 76.31 days (78.00 days) is slightly lower than prior ARL studies in developing economies, such
as China (Chan et al., 2016; 84.34 days). However, the mean of ARL in Iran is greater than in developed economies, such
as the U.S. (Sharma et al., 2017; 62.87 days). Minimum and maximum ARL values after winsorizing are 21 days and 123 days,
respectively. The mean of LNFEE (the natural log of audit fees) is 6.48. Based on the full sample (1,727 firm-year observa-
tions), about 34% of the Iranian CEOs are hired from the inside, which is consistent with the findings of Oradi et al.
(2020). In comparison with the mean of insider CEOs (67%) in western countries, such as the U.S. (Brockman et al.,
2019a), the recruitment of insider CEOs in Iran is considerably lower.
For the control variables based on the full sample, the most significant descriptive findings demonstrate that the mean of
CEO tenure (CEOTEN) is 3.60 years. The mean of leverage (LEV) is 60%, which is consistent with Oradi et al. (2020) and points
to the fact that the financing system in Iran is similar to the credit insider system. Also, consistent with Oradi et al. (2020),
the mean of foreign operations (FOREIGN) is 69%, and almost 65% of the firms have at some point restated their financial
statements (RESTATE). Moreover, approximately 77% of the firms have hired private auditing firms (AUDPVT). This finding
is consistent with MohammadRezaei and Mohd-Saleh (2018). Furthermore, the mean of the modified audit opinion (OPI-
NION) is nearly 55%, which indicates that the percentage of modified opinions in Iran is considerably higher compared to
other countries, such as the U.S. and Australia (see MohammadRezaei, Mohd-Saleh, Jaffar, & Sabri, 2016). Consistent with
the research on corporate governance in Iran (e.g., Oradi et al., 2020; Oradi & Izadi, 2019), the means of board size (B_SIZE),
6
Table 2
Descriptive statistics.
Panel A: Descriptive statistics for the variables used in the ARL model (n = 1,727)
Variables Mean Median Std. Dev. Max. 0.75 0.25 Min.
ARL 76.31 78.00 25.98 123.00 101.00 53.00 21.00
CEOINSIDER 0.34 0.00 0.48 1.00 1.00 0.00 0.00
CEOTEN 3.60 3.00 2.75 14.00 5.00 1.00 1.00
SIZE 13.83 13.70 1.40 18.38 14.56 12.93 10.67
LEV 0.60 0.62 0.20 1.22 0.74 0.47 0.11
ROA 0.11 0.10 0.12 0.51 0.17 0.03 –0.25
LOSS 0.10 0.00 0.30 1.00 0.00 0.00 0.00
RECINV 0.51 0.51 0.19 0.88 0.66 0.36 0.06
CURR 0.64 0.67 0.20 0.94 0.81 0.50 0.11
MBV 2.44 2.00 2.14 11.69 3.12 1.21 –0.35
ACCRUALS –0.01 –0.02 0.12 0.31 0.04 –0.08 –0.45
LNAGE 3.54 3.66 0.41 4.16 3.87 3.26 2.30
FOREIGN 0.69 1.00 0.46 1.00 1.00 0.00 0.00
SUBS 0.33 0.00 0.47 1.00 1.00 0.00 0.00
RESTATE 0.65 1.00 0.47 1.00 1.00 0.00 0.00
BUSY 0.86 1.00 0.34 1.00 1.00 1.00 0.00
GCO 0.03 0.00 0.17 1.00 0.00 0.00 0.00
AUDPVT 0.77 1.00 0.41 1.00 1.00 1.00 0.00
OPINION 0.55 1.00 0.49 1.00 1.00 0.00 0.00
AUDITCHANGE 0.23 0.00 0.42 1.00 0.00 0.00 0.00
B_SIZE 5.11 5.00 0.40 7.00 5.00 5.00 5.00
B_IND 0.64 0.60 0.17 1.00 0.80 0.60 0.20
CONOWN 0.77 0.81 0.18 1.00 0.89 0.69 0.09
INSTOWN 0.38 0.30 0.30 0.98 0.66 0.11 0.00
Panel B: Descriptive statistics for the variables used in the audit fee model (n = 1,002)
Variables Mean Median Std. Dev. Max. 0.75 0.25 Min.
LNFEE 6.48 6.42 0.89 9.44 7.09 5.83 3.00
CEOINSIDER 0.36 0.00 0.48 1.00 1.00 0.00 0.00
CEOTEN 3.78 3.00 2.97 14.00 5.00 1.00 1.00
SIZE 13.68 13.65 1.32 18.38 14.48 12.82 10.67
ATURN 0.94 0.80 0.63 3.87 1.09 0.57 0.11
LEV 0.59 0.60 0.20 1.22 0.72 0.45 0.11
ROA 0.12 0.11 0.13 0.51 0.19 0.04 –0.25
LOSS 0.10 0.00 0.30 1.00 0.00 0.00 0.00
RECINV 0.53 0.55 0.21 0.89 0.70 0.39 0.06
CURR 0.65 0.69 0.19 0.95 0.82 0.54 0.12
MBV 2.59 2.12 2.17 11.69 3.37 1.34 –3.77
ACCRUALS –0.00 –0.01 0.13 0.31 0.06 –0.08 –0.46
ZSCORE 1.96 1.91 1.35 6.93 2.65 1.25 2.09
ISSUE 0.21 0.00 0.41 1.00 0.00 0.00 0.00
LNAGE 3.61 3.74 0.36 4.16 3.89 3.37 2.30
FOREIGN 0.67 1.00 0.47 1.00 1.00 0.00 0.00
SUBS 0.30 0.00 0.46 1.00 1.00 0.00 0.00
R&D 0.06 0.00 0.23 1.00 0.00 0.00 0.00
RESTATE 0.62 1.00 0.48 1.00 1.00 0.00 0.00
BUSY 0.85 1.00 0.35 1.00 1.00 1.00 0.00
GCO 0.04 0.00 0.19 1.00 0.00 0.00 0.00
AUDPVT 0.77 1.00 0.41 1.00 1.00 1.00 0.00
OPINION 0.54 1.00 0.49 1.00 1.00 1.00 0.00
AUDITCHANGE 0.22 0.00 0.42 1.00 0.00 0.00 0.00
B_SIZE 5.08 5.00 0.32 7.00 5.00 5.00 5.00
B_IND 0.65 0.60 0.16 1.00 0.80 0.60 0.20
CONOWN 0.76 0.80 0.18 0.98 0.90 0.68 0.09
INSTOWN 0.39 0.31 0.30 0.98 0.66 0.10 0.00
Note: Refer to Appendix A for variable definitions.
board independence (B_IND), ownership concentration (CONOWN), and institutional ownership (INSTOWN) equal 5.11%, 64%,
77%, and 38%, respectively.
Table 3 provides mean difference of the variables for firms with insider CEOs versus outsider CEOs. The mean of ARL in
firms with insider CEOs is considerably longer than firms with outsider CEOs. However, the mean of audit fees is not signif-
icantly different for firms with insider CEOs than firms with outsider CEOs. Furthermore, compared with firms with outsider
CEOs, firms with insider CEOs have longer average tenure (CEOTEN), smaller firm size (SIZE), lower ROA, lower leverage (LEV),
a lower ratio of the receivables and inventory (RECINV), a lower market to book value (MBV), fewer R&D expenses, and
7
Table 3
Mean differences test.
CEOINSIDER = 1 CEOINSIDER = 0
Variables N Mean N Mean Difference p-value
ARL 601 84.98 1,126 71.68 13.30*** 0.000
LNFEE 370 6.53 632 6.46 0.07 0.314
CEOTEN 601 4.23 1,126 3.27 0.96*** 0.000
SIZE 601 13.67 1,126 13.92 –0.25*** 0.000
ATURN 370 0.96 632 0.92 0.04 0.337
LEV 601 0.59 1,126 0.61 –0.02** 0.018
ROA 601 0.10 1,126 0.11 –0.01* 0.073
LOSS 601 0.09 1,126 0.10 –0.01 0.704
RECINV 601 0.50 1,126 0.52 –0.02* 0.072
CURR 601 0.63 1,126 0.64 –0.01 0.115
MBV 601 2.28 1,126 2.52 –0.24** 0.027
ACCRUALS 601 –0.01 1,126 –0.02 0.01 0.403
ZSCORE 370 2.00 632 1.94 0.06 0.512
ISSUE 370 0.24 632 0.20 0.04 0.141
LNAGE 601 3.59 1,126 3.52 0.07*** 0.000
FOREIGN 601 0.61 1,126 0.74 –0.13*** 0.000
SUBS 601 0.37 1,126 0.32 0.05** 0.035
R&D 370 0.02 632 0.07 –0.05*** 0.003
RESTATE 601 0.66 1,126 0.65 0.01 0.943
BUSY 601 0.76 1,126 0.91 –0.15*** 0.000
GCO 601 0.03 1,126 0.02 0.01 0.267
AUDPVT 601 0.85 1,126 0.73 0.12*** 0.000
OPINION 601 0.60 1,126 0.52 0.08*** 0.002
AUDITCHANGE 601 0.22 1,126 0.23 –0.01 0.856
B_SIZE 601 5.19 1,126 5.07 0.12*** 0.000
B_IND 601 0.65 1,126 0.64 0.01 0.703
CONOWN 601 0.71 1,126 0.79 –0.08*** 0.000
INSTOWN 601 0.37 1,126 0.38 –0.01 0.583
Notes: *, **, *** indicate significance at the 10%, 5%, and 1% levels (two-tailed), respectively. Refer to Appendix A for variable definitions.
existed longer (LNAGE). In addition, firms with insider CEOs have fewer foreign operations (FOREIGN), more subsidiaries
(SUBS), fewer auditors’ busy season (BUSY), more board members (B_SIZE), and lower ownership concentration (CONOWN)
than firms with outsider CEOs. Firms with insider CEOs are also more likely to be audited by a private firm (AUDPVT) and
have more modified audit opinions (OPINION) than firms with outsider CEOs. However, the means of other the variables
when comparing firms with insider CEOs and outsider CEOs are not significantly different.
The correlation coefficients of the variables do not indicate any multicollinearity problem, as the highest pairwise corre-
lation is 0.85 (untabulated). Furthermore, the results of the Variance Inflation Factor (VIF) scores (untabulated) for the inde-
pendent variables are<5, again indicating that multicollinearity is not a problem.
5.2. Regression results
5.2.1. Relationship between CEO succession origin and audit report delay
Table 4 presents three OLS regressions of audit delays on CEO succession origin, where ARL, LNARL, and IAARL are
regressed, in turn, against CEOINSIDER and the control variables, respectively. All three models are significant at
p < 0.001. Results in column 1 show that CEOINSIDER is positively and significantly associated with ARL (coefficient = 8.9
26, p < 0.01), thus, suggesting that firms with insider CEOs face an audit delay that is longer by 8.92 days compared to firms
with outsider CEOs. Using the second measure of audit delays (i.e., LNARL), the coefficient on CEOINSIDER is significant and
positive (0.127, p < 0.01), indicating that compared to outsider CEOs, insider CEOs are associated with longer audit delays. As
for IAARL, the results indicate that CEOINSIDER is significantly associated with a longer IAARL (coefficient = 7.222, p < 0.01).
Overall, the findings indicate that CEO succession origin is a statistically and economically significant determinant of audit
delay6.
Regarding the control variables, the results show that CEO tenure (CEOTEN) is significantly associated with longer audit
delays. Moreover, firm size (SIZE), firm age (LNAGE), subsidiaries (SUBS), and modified audit opinion (OPINION) are signifi-
cantly and positively associated with audit delay, which is consistent with MohammadRezaei and Mohd-Saleh (2018). In line
6
For completeness, the robustness of the main results is checked by dividing ARL into long ARL (L-ARL) and short ARL (S-ARL) groups. Firms with longer ARL
than the median of the sample ARL are categorized in the L-ARL group, whereas those with shorter ARL than the median of the sample ARL are categorized in
the S-ARL group. The untabulated analyses show that the coefficients on L-ARL and S-ARL are both positive and significant at the 0.01 and 0.10 levels,
respectively. This means that insider CEOs have a significant impact on ARL in both longer- and shorter-ARL firms. Also, these findings indicate that the main
results do not change when the sub-samples are tested separately.
8
Table 4
Regressions of ARL on CEO succession origin.
Dependent variable ARL LNARL IAARL

Variables P. sign Coef. p-value Coef. p-value Coef. p-value
Intercept +/– 21.090 0.112 3.464*** 0.000 –25.156* 0.054
CEOINSIDER ? 8.926*** 0.000 0.127*** 0.000 7.222*** 0.000
CEOTEN + 0.678*** 0.001 0.009*** 0.001 0.265 0.206
SIZE + 2.547*** 0.000 0.039*** 0.000 1.430*** 0.003
LEV + 4.840 0.196 0.063 0.253 9.860** 0.010
ROA – –7.705 0.262 –0.143 0.162 11.368 0.105
LOSS + 2.305 0.281 0.021 0.491 11.094 0.627
RECINV + 5.903 0.288 0.061 0.459 16.544*** 0.004
CURR – –7.266 0.198 –0.094 0.262 –28.913*** 0.000
MBV + 0.032 0.903 0.009 0.981 0.026 0.924
ACCRUALS + 4.055 0.384 0.029 0.671 4.937 0.318
LNAGE ? 7.807*** 0.000 0.111 0.000 6.781*** 0.000
FOREIGN + –3.986*** 0.004 –0.060*** 0.004 2.176* 0.097
SUBS + 8.819*** 0.000 0.132*** 0.000 9.380*** 0.000
RESTATE + 0.953 0.339 0.016 0.388 1.645 0.165
BUSY + 0.520 0.773 0.006 0.805 –0.163 0.927
GCO + –1.626 0.609 –0.036 0.437 –0.686 0.836
AUDPVT – –3.591*** 0.009 –0.046** 0.024 –3.656** 0.011
OPINION + 9.358*** 0.000 0.136*** 0.000 8.271*** 0.000
AUDITCHANGE + 1.503 0.236 0.025 0.180 1.571 0.246
B_SIZE + 1.320 0.403 0.011 0.610 –1.547 0.308
B_IND – –12.945*** 0.000 –0.168*** 0.001 –13.132*** 0.000
CONOWN – –14.378*** 0.000 –0.182*** 0.000 –12.028*** 0.000
INSTOWN – 2.201 0.219 0.046* 0.084 4.750** 0.010
YEAR_FE YES YES YES
IND_FE YES YES NO
Adj. R-square 0.344 0.336 0.170
Observations 1,727 1,727 1,727
with prior studies (Abernathy et al., 2018; Baatwah et al., 2015; MohammadRezaei & Mohd-Saleh, 2018), foreign operations
(FOREIGN), private auditor (AUDPVT), board independence (B_IND), and ownership concentration (CONOWN) are significantly
and negatively associated with audit delay.
5.2.2. Relationship between CEO succession origin and audit fess

Table 5 presents the OLS regression analysis of the association between CEO succession origin and audit fees. It shows
that the coefficient on the variable CEOINSIDER is positive and statistically and economically significant at the 5% level. This
suggests that audit fees are higher for firms with insider CEOs. The control variables including firm size (SIZE), asset turnover
(ATURN), current ratio (CURR), firm age (LNAGE), subsidiaries (SUBS), and financial restatements (RESTATE) are positively
related to audit fees. In contrast, leverage (LEV), financial health (ZSCORE), audit busy season (BUSY), auditor type (AUDPVT),
audit opinion (OPINION), and institutional ownership (INSTOWN) are negatively related to audit fees. These results are gen-
erally consistent with prior studies (e.g., Ho & Kang, 2013; Azizkhani et al., 2018; MohammadRezaei et al., 2018). All of the
above findings provide robust evidence that appointing a CEO with internal experience increases audit effort in Iran.
5.3. Sensitivity tests
5.3.1. Alternative estimation approaches

In this section, I first control for unobserved time-invariant firm heterogeneity by re-estimating the regressions using firm
fixed effects. Table 6 provides the results. Column 1 of Panel A presents the results of the association between CEO succession
origin and ARL after controlling for firm-level fixed effects. The coefficient of CEOINSIDER is positive and significant at the 1%
level. Column 1 of Panel B reports the results of the association between CEO succession origin and audit fees when using the
firm fixed-effect regression. The coefficient of CEOINSIDER is positive and significant at the 10% level. These results suggest
that firm-level unobserved heterogeneity does not affect the findings.
Second, I control for potential endogenous relationships between CEO succession origin with ARL and audit fees. As CEO
succession origin may be correlated to other determinants of ARL and audit fees, the results are subject to the endogeneity of
CEO selection. For example, firms with low-quality financial information (or poor performance) tend to replace a CEO with
insiders. To address these concerns, I use the propensity-score-matching (PSM) approach. PSM allows us to identify a control
sample of firms that have an outsider CEO and simultaneously the characteristics of the firms with outsider CEO (control
group) should be statistically similar to those of firms with insider CEO (treatment group) in terms of the determinants of
ARL and audit fees. To implement the PSM approach, I first estimate the probability of selecting an insider CEO by employing
9
Table 5
Regression of audit fees on CEO succession origin.
Dependent variable LNFEE

Variables P. sign Coef. p-value
Intercept +/– 1.690*** 0.001
CEOINSIDER ? 0.076** 0.043
CEOTEN + –0.001 0.846
SIZE + 0.296*** 0.000
ATURN + 0.316*** 0.000
LEV + 0.297** 0.029
ROA 0.315 0.175
LOSS + 0.087 0.216
RECINV + 0.096 0.572
CURR 0.395** 0.026
MBV + 0.007 0.411
ACCRUALS + 0.124 0.402
ZSCORE 0.124*** 0.000
ISSUE + 0.004 0.923
LNAGE ? 0.218*** 0.000
FOREIGN + 0.049 0.257
SUBS + 0.076* 0.063
R&D + 0.043 0.573
RESTATE + 0.071** 0.046
BUSY + 0.173*** 0.002
GCO + 0.007 0.940
AUDPVT 0.627*** 0.000
OPINION + 0.181*** 0.000
AUDITCHANGE 0.037 0.360
B_SIZE + –0.038 0.517
B_IND – 0.130 0.251
CONOWN – –0.033 0.766
INSTOWN – –0.168*** 0.006
YEAR_FE YES
IND_FE YES
Adj. R-square 0.678
Observations 1,002
a probit regression of the ‘‘CEOINSIDER” dummy variable against determinants of ARL and audit fees. I then match, without
replacement, an insider CEO with an outsider CEO based on the closest fitted value (within 3%) taken from the first-stage
probit estimation. Next, the regressions are estimated using the matched samples. Table 6 presents the results. After control-
ling for endogeneity using the PSM approach, CEOINSIDER is significantly positively associated with ARL and audit fees. Thus,
the results were unlikely to be influenced by endogeneity.
5.3.2. CEO turnover

Following previous studies (e.g., Lu & Cao, 2018; Oradi et al., 2020), the OLS regression models are estimated with a sam-
ple of firms that changed their CEO to control for manager fixed effects, because firm characteristics can change as well as
CEOs during the sample period. Estimating the regression models with a sample of observations that CEOs in the first year of
their tenure (new CEOs) can provide solid evidence regarding the association between CEO succession origin and ARL and
audit fees. A review of the observations shows 462 CEO turnovers in the full sample. Moreover, the sample of observations
on audit fees has 268 CEO turnovers. The results in Panel A of Table 7 indicate that the coefficients on CEOINSIDER remain
positive and significant (p < 0.05 and p < 0.10, respectively), suggesting that hiring a new CEO from within the firm is asso-
ciated with longer ARL and higher audit fees.
5.3.3. Changes in ARL and audit fees

As a robustness test, I consider changes in ARL and audit fees regressions. By doing these analyses, I control for changes in
firm characteristics. The change models are as follows:
DLNARLit ¼ a0 þ a1 DCEOINSIDERit þ a3 DControlVariablesit þ YEAR FE þ IND FE þ eit ð3Þ
DLNFEEit ¼ a0 þ a1 DCEOINSIDERit þ a3 DControlVariablesit þ YEAR FE þ IND FE þ eit ð4Þ
10
Table 6
Alternative estimation approaches.
Panel A: ARL model

Dependent variable LNARL
Method Firm Fixed Effects Propensity Score Matching
Variables P. sign Coef. p-value Coef. p-value
Intercept +/– 3.979*** 0.000 4.053*** 0.000
CEOINSIDER ? 0.051*** 0.001 0.118*** 0.000
CEOTEN + –0.005** 0.030 0.008** 0.028
SIZE + 0.019 0.159 0.013 0.174
LEV + 0.019 0.700 0.106 0.145
ROA – –0.226*** 0.008 –0.147 0.284
LOSS + 0.040* 0.083 0.038 0.362
RECINV + 0.073 0.245 –0.091 0.421
CURR – –0.083 0.266 –0.001 0.988
MBV + –0.001 0.499 0.002 0.709
ACCRUALS + 0.137*** 0.007 0.027 0.777
LNAGE ? 0.029 0.685 0.038 0.180
FOREIGN + –0.014 0.507 –0.054** 0.045
SUBS + 0.003 0.918 0.117*** 0.000
RESTATE + 0.015 0.264 –0.002 0.922
BUSY + 0.030 0.704 0.090*** 0.005
GCO + –0.012 0.733 –0.006 0.909
AUDPVT – –0.052** 0.019 –0.039 0.179
OPINION + 0.056*** 0.000 0.110*** 0.000
AUDITCHANGE + 0.026** 0.037 0.028 0.250
B_SIZE + 0.006 0.974 –0.001 0.943
B_IND – –0.008 0.685 –0.139** 0.041
CONOWN – –0.069 0.227 –0.233*** 0.000
INSTOWN – –0.072* 0.092 0.012 0.741
Year fixed effects YES YES
Industry fixed effects NO YES
Adj. R-square 0.193 0.249
Observations 1,727 1,114
Panel B: Audit fee model

Intercept +/– –9.265*** 0.000 1.022** 0.011
CEOINSIDER ? 0.047* 0.084 0.079** 0.032
CEOTEN + –0.001 0.823 0.003 0.680
SIZE + 0.507*** 0.000 0.327*** 0.000
ATURN + 0.370*** 0.000 0.364*** 0.000
LEV + –0.665*** 0.000 –0.571*** 0.000
ROA – 0.706*** 0.006 0.417 0.132
LOSS + 0.095 0.146 –0.180** 0.029
RECINV + –0.057 0.717 0.076 0.727
CURR – 0.521*** 0.011 0.369* 0.097
MBV + 0.003 0.618 0.010 0.340
ACCRUALS + –0.236* 0.080 –0.223 0.231
ZSCORE – –0.221*** 0.000 –0.138*** 0.000
ISSUE + 0.013 0.702 –0.008 0.814
LNAGE ? 2.538*** 0.000 0.235*** 0.000
FOREIGN + 0.085 0.138 –0.022 0.675
SUBS + 0.028 0.799 0.082 0.115
R&D + 0.182 0.142 0.243** 0.025
RESTATE + 0.028 0.175 0.066 0.153
BUSY + –0.155 0.719 –0.082 0.205
GCO + –0.113 0.886 –0.006 0.955
AUDPVT – –0.370*** 0.000 –0.675*** 0.000
OPINION + –0.130*** 0.001 –0.130*** 0.004
AUDITCHANGE – –0.009 0.777 –0.052 0.291
B_SIZE + –0.004 0.937 0.063 0.338
B_IND – 0.247* 0.092 0.236* 0.095
CONOWN – –0.015 0.923 –0.262** 0.048
INSTOWN – –0.132 0.304 –0.200** 0.010
Year fixed effects YES YES
(continued on next page)
11
Table 6 (continued)
Panel B: Audit fee model

Industry fixed effects NO YES
Observations 1,002 676
Table 7
Regressions of CEO turnover and changes of ARL and audit fees.
Panel A: Firm-year observations with CEO turnover

Dependent variable LNARL LNFEE
Intercept +/– 3.483*** 0.000 0.132 0.750
CEOINSIDER ? 0.086** 0.013 0.150* 0.051
CONTROLS YES YES
YEAR_FE YES YES
IND_FE YES YES
Observations 462 268
Panel B: Change regressions of ARL and audit fees on CEO succession origin
Dependent variable DLNARL DLNFEE
Intercept +/– 0.020 0.426 1.322*** 0.001
DCEOINSIDER ? 0.067** 0.042 0.031 0.315
DCONTROLS YES YES
YEAR_FE YES YES
IND_FE YES YES
Where DLNARL is the year-to-year change in the natural log of audit delays; DLNFEE is the year-to-year change in the
natural log of audit fees; DCEOINSIDER is a dummy variable equal to 1 if the prior CEO is an outsider while the new CEO
is an insider; and DControlVariables is the year-to-year change in the control variables used in models 1 and 2, respectively7.
Table 7, Panel B reports the results. In the ARL change regression, the coefficient on DCEOINSIDER is significant and positive
(0.067, p < 0.05). This result supports previous findings suggesting that insider CEOs are associated with longer ARL. However,
in the audit fees change regression, the coefficient on DCEOINSIDER is positive but not significant.
5.3.4. Effect of audit firm type

Previous studies in Iran demonstrate that firms audited by private audit firms are associated with shorter ARL and lower
audit fees compared to firms audited by state audit firms (the Iranian Audit Organization) (Azizkhani et al., 2018;
MohammadRezaei & Mohd-Saleh, 2018). Therefore, there is a possibility that state audit firms may drive the results of this
study. Table 8 presents the regressions based on dividing the sample into private and state auditors. The coefficients of
CEOINSIDER are positive and significant when firms are audited by private auditors as shown in Columns 1 of Panels A
and B. In contrast, the coefficients of CEOINSIDER for firms with state auditors are not significant. Altogether, the results indi-
cate that the findings are not driven by state audit firms and the positive association between insider CEOs with ARL and
audit fees are more pronounced in firms audited by private audit firms.
7
I do not control for the variable BUSY in change regressions as the fiscal year-ends of the sample firms do not change. Furthermore, the number of board
members (B_SIZE) of the sample firms does not significantly change during the research period, and accordingly the majority of its observations take the value
of 0. Thus, this variable is also not included in the change regressions.
12
Table 8
Regression results of sub-samples of auditor type (private versus state).
Panel A: Regression of ARL on CEO succession origin

Dependent variable LNARL
Private Auditors State Auditors

Intercept +/– 3.759*** 0.000 1.688*** 0.000
CEOINSIDER ? 0.142*** 0.000 0.054 0.155
CONTROLS YES YES
YEAR_FE YES YES
IND_FE YES YES
Panel B: Regression of audit fees on CEO succession origin
Private Auditors State Auditors

Intercept +/– –0.420 0.424 3.565*** 0.001
CEOINSIDER ? 0.095** 0.022 0.083 0.239
CONTROLS YES YES
YEAR_FE YES YES
IND_FE YES YES
Observations 774 228
5.3.5. Additional control variables

Prior literature suggests that audit committee characteristics affect ARL and audit fees (e.g., Sultana et al., 2015; Abbott,
Parker, Peters, & Raghunandan, 2003). To rule out the possibility that the results are influenced by this, I control for the
potential effects of audit committee characteristics on ARL and audit fees. It is compulsory for Iranian firms to establish audit
committees according to the internal control regulations enacted in 2012. Therefore, I include audit committee size, inde-
pendence, and financial expertise as additional explanatory variables and run the regression models for the years from
2012 to 2017. Untabulated results show that including these variables as controls does not affect main findings.
6. Conclusion
Despite the significant role of top management in the annual audit process, the auditing literature seldom discusses how CEO
succession origin affects audit outcomes. This study examines the relationship between CEO succession origin with ARL and
audit fees in the Iranian context with unique institutional characteristics. My results show that the delay in the audit report
is longer if the CEO is hired from within the firm. Moreover, firms with insider CEOs pay higher audit fees. Further analysis shows
that these relationships are more pronounced when firms are audited by private auditors. Altogether, the findings demonstrate
that promoting an insider to the CEO position in an emerging economy context leads to longer audit delays and higher audit fees.
That is, in the Iranian context, firms hiring CEOs from within have higher audit risk than in firms recruiting CEOs from outside.
Most previous studies examine the effect of managerial characteristics, such as gender, tenure, financial experience, and
ability, on corporate audit outcomes. Therefore, this study contributes to the literature by providing new empirical evidence
that CEO succession origin significantly impacts audit delays and audit fees in the context of emerging economies. Previ-
ously, Brockman et al. (2019a) reported that in the U.S., firms with insider CEOs pay lower audit fees. We should bear in mind
that U.S. companies, compared to the Iranian companies, operate in an environment with strong corporate governance and
legal institutions that can significantly reduce managerial abuse. Specifically, in environments with strong corporate gover-
nance, CEOs’ knowledge and past experience may be used to serve the firm’s interests. In contrast, relatively weak monitor-
ing mechanisms in Iran provide firm executives with the opportunity to have more discretion and power over the firm’s
reporting process. In particular, firm-specific knowledge could facilitate inside managers in making inappropriate adjust-
ments to financial reports and pursuing personal gains. Consequently, in such an environment, auditors may estimate higher
audit risk when facing CEOs recruited from inside the firm, leading to an increase in audit effort.
However, conflicting results suggests the need for further research on the implications of CEO succession origin for audi-
tors in different markets. Moreover, future research can examine other CEO characteristics and discuss how these character-
istics influence corporate audit outcomes. My findings should be of interest to auditors, regulators, investors, and researchers
as they provide evidence that CEO succession origin significantly informs about audit outcomes. Specifically, CEO succession
origin should be considered by auditors in their client screening, audit planning, and determining the amount of audit work
that should be performed.
13
This study is subject to certain limitations. As there is a lack of public disclosure and cooperation between academia and
the firms is inadequate in the Iranian context, the research cannot be enriched. For instance, information related to other CEO
characteristics, including the CEO’s in-house experience, the number of years the CEO worked in the firm before being pro-
moted to CEO, and the age of the CEO was not available. In the present study, CEOs are categorized into groups of outsider
and insiders CEOs, but this categorization fails to encompass the varying degrees of CEOs’ firm-specific knowledge and famil-
iarity. Insider CEOs’ association with the firm may not be the same, and CEOs who have longer work experience in the firm
may be more familiar with the firm and possess much more firm-specific knowledge. Thus, these limitations warrant further
studies to re-explore the issue and determine whether the study’s findings are applicable to other developing country set-
tings. Moreover, other phenomena not related to audit effort could be measured by ARL and audit fees. For instance, audit
fees may indicate the bargaining power of the auditor and the auditee, whereas ARL might signify audit efficiency. Never-
theless, considering the special context of this study, I argue that ARL and audit fees are a reflection of auditor effort.
Declaration of Competing Interest
The author declare that they have no known competing financial interests or personal relationships that could have
appeared to influence the work reported in this paper.
Acknowledgement
I am thankful to Prof. Robert K. Larson (editor-in-chief) and anonymous reviewers for their helpful comments. I am also
grateful to Ms. Farzaneh Mohammadzadeh for proofreading. Any errors are my own.
Appendix A:
Variables definitions.
Variable Description
Main Variables
ARL Audit report lag is the number of days between the firm’s fiscal year-end date and the audit report date
LNARL The natural log of ARL
IAARL The difference between ARL and the median of ARL for a given industry
LNFEE The natural logarithm of total audit fees paid by the client to their external auditor
CEOINSIDER Equals 1 if the CEO is recruited from within the firm, and 0 otherwise
Control
Variables
CEOTEN CEO tenure is the number of years working as a CEO in the firm
SIZE The natural logarithm of the client’s total assets
ATURN Asset turnover, measured as sales divided by total assets
LEV Total debt scaled by lagged total assets
ROA Return on assets calculated as the ratio of net income to total assets
LOSS Equals 1 if net income is negative, and 0 otherwise
RECINV Receivables (RECT) plus Inventory (INVT), all scaled by total assets
CURR Current assets divided by total assets
MBV Ratio of market value to book value of equity as of year-end.
ACCRUALS Total accruals calculated as earnings minus operating cash flows to total assets ratio
ZSCORE Financial distress calculated using a modified Altman’s Z-score proposed by MacKie-Mason (1990). The higher the Z, the lower the
chance of financial distress. The MacKie-Mason (1990) model is as follows:
Z = 3.3 (EBIT/Total Assets) + 1 (Sales/Total Assets) + 1.4 (Retained Earnings/Total Assets) + 1.2 (Working Capital/Total Assets)
ISSUE Equals 1 if a firm issued common or preferred stocks, and 0 otherwise
LNAGE The natural logarithm of number of years the firm is establishment
FOREIGN Equals 1 if the firm has foreign operations, and 0 otherwise
SUBS Equals 1 if a firm has a subsidiary or subsidiaries, and 0 otherwise
R&D Equals 1 if the firm has R&D expenses, and 0 otherwise
RESTATE Equals 1 if the firm has a financial statement restatement, and 0 otherwise
BUSY Equals 1 if the fiscal year-end of a firm is March 20, and 0 otherwise
GCO Equals 1 if the firm received a modified going-concern opinion, and 0 otherwise
AUDPVT Equals 1 if the auditor is a private audit firm, and 0 otherwise
OPINION Equals 1 if the firm receives a modified audit opinion, and 0 otherwise
AUDITCHANGE Equals 1 if there was a change in auditor, and 0 otherwise
B_SIZE The number of directors on the board of directors
B_IND The percentage of independent directors on the board of directors
CONOWN The percentage of a firm’s outstanding shares owned by the largest shareholder
INSTOWN The percentage of the firm’s shares held by institutional investors
YEAR_FE Year fixed effects indicator variables
IND_FE Industry fixed effects indicator variables
14
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Journal of International Accounting, Auditing and Taxation xxx (xxxx) xxx

Contents lists available at ScienceDirect

Journal of International Accounting,

E-mail address: ja_oradi@mail.um.ac.ir

3. Literature review and hypotheses development

3.1. CEO succession origin

3.2. Hypotheses development

4.1. Data and sample

4.2. H1: ARL model

4.3. H2: Audit fee model

Panel A: Sample selection procedure

Model 1 (H1) Model 2 (H2)

5.1. Descriptive statistics

Note: Refer to Appendix A for variable definitions.

5.2. Regression results

Dependent variable ARL LNARL IAARL

5.2.2. Relationship between CEO succession origin and audit fess

5.3. Sensitivity tests

5.3.1. Alternative estimation approaches

Dependent variable LNFEE

5.3.2. CEO turnover

5.3.3. Changes in ARL and audit fees

DLNFEEit ¼ a0 þ a1 DCEOINSIDERit þ a3 DControlVariablesit þ YEAR FE þ IND FE þ eit ð4Þ

Panel A: ARL model

Panel B: Audit fee model

(continued on next page)

Panel B: Audit fee model

Panel A: Firm-year observations with CEO turnover

5.3.4. Effect of audit firm type

Panel A: Regression of ARL on CEO succession origin

Private Auditors State Auditors

Private Auditors State Auditors

5.3.5. Additional control variables

Declaration of Competing Interest

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