Boardroom Backscratching and Audit Fees

SUMMARY This study investigates the impact of backscratching between the CEO and directors on a firm's future performance, financial reporting quality, and audit fees. We find that the presence and extent of boardroom backscratching are associated with weaker future performance, poorer quality financial reporting, and higher audit fees. We attribute these findings to backscratching firms' increased business and information risks inducing auditors to exert greater effort and charge risk premiums in response to heightened audit engagement risks. We observe consistent results when extending our investigation to backscratching between the CEO and audit committee and between the CEO and the CFO, given that the audit committee and the CFO influence financial reporting quality. Finally, we provide evidence that backscratching firms display greater audit report lag and a higher likelihood of receiving a going concern audit opinion. Our study offers insights to regulators concerning policy development to strengthen board effectiveness and remuneration disclosures.