The Impact of CEO Overconfidence and Fraud Risk on Audit Effort

This study investigates the relationship between CEO overconfidence and audit efforts, with a particular focus on the moderating effect of fraud risk. Utilizing data from firms listed on KOSPI and KOSDAQ between 2017 and 2021, we explore how CEO overconfidence influences auditors’ assessment of inherent risk and subsequent audit efforts. Hypothesis 1 reveals that in the Korean context, the supply side of the audit process, driven by auditors’ assessment of inherent risks associated with overconfident CEOs, plays a more significant role than the demand side. Furthermore, we find that the occurrence of fraud events significantly strengthens the positive association between CEO overconfidence and audit effort. This heightened scrutiny from stakeholders following a fraud incident serves as a critical monitoring mechanism, compelling auditors to increase their efforts to mitigate the risk of financial misstatements. Our findings contribute to the broader understanding of audit pricing dynamics, offering new insights into the interplay between management behavior and audit practices. The results also have practical implications for policymakers and auditors, highlighting the importance of considering both inherent and fraud risks in audit planning and execution.