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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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Published: 05 January 2026
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