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| Does the Vacancy Time of the Chief Audit Executive Position Affect Corporate Earnings Management? |
| Li Zheng, Zhao Zhonghua, Wang Zichen |
| School of Accounting/Audit, Yunnan University of Finance and Economics, Kunming 650023, China |
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Abstract The Chief Audit Executive (CAE) is the leader responsible for the execution of a firm’s internal audit activities, playing a pivotal role in formulating internal audit plans, approving internal audit programs, monitoring and guiding internal audit activities, and ensuring the implementation of follow-up audit recommendations. However, CAE does not remain unchanged. After a CAE departs, some firms do not appoint new people to the CAE position, leaving the position vacant. Currently, extant academic literature provides limited systematic and in-depth investigation into the economic consequences of CAE vacancy, particularly concerning their implications for earnings management.This study investigates the impact of CAE vacancy duration on corporate earnings management based on samples of manufacturing firms listed on the Small and Medium-sized Enterprise (SME) Board of the Shenzhen Stock Exchange from 2013 to 2023. Data on CAE vacancy were constructed through a combination of manual collection and Python-based analysis. Specifically, official announcements on the Shenzhen Stock Exchange’s information disclosure platform were searched for keywords related to internal audit (such as “audit”, “supervision” and “inspection”). Subsequently, Python was employed to scrape and perform text analysis on all board meeting announcements for the sample firms over the 11-year period (2013-2023), yielding data on CAE vacancy occurrences and durations.Based on the above data, the study examines the relationship between the length of CAE vacancy and corporate earnings management. Baseline regression results indicate that a longer CAE vacancy duration increases the likelihood of upward REM and the extent of a firm’s AEM. To enhance the robustness of baseline findings, the study employs various of robustness tests, including propensity score matching (PSM), the Heckman two-stage model, instrumental variable (IV) estimation, fixed effects regressions, the use of alternative measures for independent and dependent variables, changes in the research sample, controlling for audit committee and management characteristics, incorporating the annual report disclosure, examining CAE turnover, considering the impact of the COVID-19 pandemic, and accounting for instances of other executives assuming CAE responsibilities. These robustness checks consistently support the baseline results.Mechanism analysis reveals that the quality of internal control acts as a mediating variable in the relationship between CAE vacancy duration and earnings management. Furthermore, heterogeneity analysis demonstrates that the positive effect of CAE vacancy duration on earnings management is more pronounced in firms characterized by lower levels of Party organization involvement in corporate governance, non-state-owned enterprises (non-SOEs), lower shareholding percentages by the supervisory board, less media attention, and lower institutional investor ownership. These findings suggest a complementary monitoring role between the CAE function and other internal and external governance mechanisms, including Party organizations, ownership structure, supervisory boards, media scrutiny, and institutional investors.Based on these findings, the study offers policy recommendations. Firms should enhance their human resource planning for the internal audit function. To maximize the governance effectiveness of the internal audit department, companies should proactively identify and select suitable candidates before a CAE vacancy occurs, thereby minimizing prolonged periods without a CAE. Additionally, strengthening other internal and external monitoring mechanisms can help mitigate the adverse consequences associated with CAE vacancy.This study potentially contributes to literature in the following ways. First, while existing research predominantly focuses on the impact of CAE turnover on the quality of corporate financial reporting, few studies has paid attention to the dimension of CAE vacancy. On the one hand, CAE turnover fundamentally differs from CAE vacancy. The former reflects the change of people responsible for the position. The latter, however, reflects the vacancy and vacancy duration of position and signifies a lack of active performance of the responsibilities. CAE turnover is different, and if a successor is appointed after a turnover, the functional responsibilities of the position can still be fulfilled. Consequently, a longer duration of CAE vacancy is likely to have a more substantial impact on the execution of responsibilities. This study focuses on CAE vacancy, offering a novel perspective for understanding the absence of critical governance roles. On the other hand, by examining the duration of the vacancy and developing a “CAE vacancy duration-earnings management” logical framework, this study not only reveals a positive association between these but also addresses a gap in the CAE literature regarding the temporal dimension. Second, the heterogeneity analysis considers the differential impacts of CAE vacancy on corporate earnings management under varying internal and external governance factors, such as the Party’s involvement in corporate governance, the nature of ownership, the supervisory board, media scrutiny, and institutional investors. This enriches the studies on the joint governance effects of internal and external corporate supervision mechanisms.
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Received: 22 January 2025
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2026, Vol. 56 
