Senior Management Team Stability as a Hidden Factor in Audit Risk

Authors

  • Akram Afsay * Department of Accounting, Farabi College, University of Tehran, Qom, Iran.
  • Hassan Shafikhan Department of Accounting, Farabi College, University of Tehran, Qom, Iran.

https://doi.org/10.22105/tqfb.v2i3.72

Abstract

This article examines the role of senior management team stability as a hidden factor in the formation and transmission of audit risk and attempts to clarify the behavioral and institutional dimensions of this variable in risk assessment processes through conceptual analysis. The audit literature shows that managerial stability can act in a dual way: on the one hand, it improves the quality of internal controls, strategic coherence, and reduces unintentional errors, and on the other hand, in the absence of independent oversight, it can intensify the concentration of power, reduce auditors' professional skepticism, and increase the risk of management fraud. The analysis of the Iranian situation suggests that the concentrated ownership structure, the relative weakness of supervisory institutions, and the professional limitations of auditing provide the basis for the emergence of hidden effects of managerial stability, causing auditors to rely on the experience and gradual understanding of the management team to assess audit risk. This paper shows that systematically identifying and analyzing the stability of the senior management team, along with paying attention to the institutional and cultural conditions of the organization, is essential to improve the accuracy of risk assessment, enhance the quality of the auditor's professional judgment, and reduce the likelihood of audit failure. Finally, the results of this literature review emphasize that management stability should not be viewed solely as a structural feature, but rather as a latent and influential variable, playing a key role in assessing audit risk and improving internal control processes, and highlighting the need to integrate it into the conceptual and practical frameworks of auditing in Iran.

Keywords:

Senior management team stability, Audit risk, Internal controls

References

  1. [1] DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of accounting and economics, 3(3), 183-199. https://doi.org/10.1016/0165-4101(81)90002-1
  2. [2] Hambrick, D. C., & Mason, P. A. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of management review, 9(2), 193-206. https://doi.org/10.5465/amr.1984.4277628
  3. [3] Hambrick, D. C. (2007). Upper echelons theory: An update. Academy of management review, 32(2), 334-343. https://doi.org/10.5465/amr.2007.24345254
  4. [4] Bazerman, M. H., Loewenstein, G., & Moore, D. A. (2002). Why good accountants do bad audits. Harvard business review, 80(11), 96-103. https://www.researchgate.net/publication/11043244
  5. [5] Nelson, M. W. (2009). A model and literature review of professional skepticism in auditing. Auditing: A journal of practice & theory, 28(2), 1-34. https://doi.org/10.2308/aud.2009.28.2.1
  6. [6] Gibbins, M., Salterio, S., & Webb, A. (2001). Evidence about auditor–client management negotiation concerning client’s financial reporting. Journal of accounting research, 39(3), 535-563. https://doi.org/10.1111/1475-679X.00027
  7. [7] Rashid, C. A. (2022). The role of internal control in fraud prevention and detection. Journal of global economics and business, 3(8), 43-55. https://www.researchgate.net/profile/Chnar-Rashid/publication/362059636
  8. [8] Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The journal of law and economics, 26(2), 301-325. https://doi.org/10.1086/467037
  9. [9] La Porta, R., Lopez‐de‐Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. The journal of finance, 54(2), 471-517. https://doi.org/10.1111/0022-1082.00115
  10. [10] Carcello, J. V., & Nagy, A. L. (2004). Audit firm tenure and fraudulent financial reporting. Auditing: A journal of practice & theory, 23(2), 55-69. https://doi.org/10.2308/aud.2004.23.2.55
  11. [11] Carpenter, M. A., Geletkanycz, M. A., & Sanders, W. G. (2004). Upper echelons research revisited: Antecedents, elements, and consequences of top management team composition. Journal of management, 30(6), 749-778. https://doi.org/10.1016/j.jm.2004.06.001
  12. [12] Arthur, M. B. (1994). The boundaryless career: A new perspective for organizational inquiry. Journal of organizational behavior, 15(4), 295-306. https://www.jstor.org/stable/2488428
  13. [13] Dalton, D. R., Daily, C. M., Ellstrand, A. E., & Johnson, J. L. (1998). Meta‐analytic reviews of board composition, leadership structure, and financial performance. Strategic management journal, 19(3), 269-290. https://doi.org/10.1002/(SICI)1097-0266(199803)19:3%3C269::AID-SMJ950%3E3.0.CO;2-K
  14. [14] Jensen, M. C., & Meckling, W. H. (2019). Theory of the firm: Managerial behavior, agency costs and ownership structure. In Corporate governance (pp. 77-132). Gower. https://doi.org/10.4324/9781315191157
  15. [15] Abraham, R., El-Chaarani, H., & Deari, F. (2024). Does audit oversight quality reduce insolvency risk, systematic risk, and ROA volatility? The role of institutional ownership. Journal of risk and financial management, 17(8), 335. https://doi.org/10.3390/jrfm17080335
  16. [16] Nguyen, Q. M., & Nguyen, C. V. (2024). Corporate governance, audit quality and firm performance–an empirical evidence. Cogent economics and finance, 12(1), 2334128. https://doi.org/10.1080/23322039.2024.2334128
  17. [17] Arens, A. A. (2025). Auditing and assurance services. Pearson Education Limited. https://www.internetdownloadmanager.com/register/new_faq/chrome_extension2.html
  18. [18] Francis, J. R. (2011). A framework for understanding and researching audit quality. Auditing: A journal of practice & theory, 30(2), 125-152. https://doi.org/10.2308/ajpt-50006
  19. [19] Nelson, M., & Tan, H. T. (2005). Judgment and decision making research in auditing: A task, person, and interpersonal interaction perspective. Auditing: A journal of practice & theory, 24(s-1), 41-71. https://doi.org/10.2308/aud.2005.24.s-1.41
  20. [20] Morais, G., & Franco, M. (2019). Deciding factors in cooperation and trust between internal and external auditors in organizations: An exploratory analysis. International journal of auditing, 23(2), 263-278. https://doi.org/10.1111/ijau.12160
  21. [21] Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1996). Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC. Contemporary accounting research, 13(1), 1-36. https://doi.org/10.1111/j.1911-3846.1996.tb00489.x
  22. [22] Hogan, C. E., Rezaee, Z., Riley Jr, R. A., & Velury, U. K. (2008). Financial statement fraud: Insights from the academic literature. Auditing: A journal of practice & theory, 27(2), 231-252. https://doi.org/10.2308/aud.2008.27.2.231
  23. [23] Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting material accounting misstatements. Contemporary accounting research, 28(1), 17-82. https://doi.org/10.1111/j.1911-3846.2010.01041.x
  24. [24] COSO. (2016). Fraud risk management guide. Committee of Sponsoring Organizations of the Treadway Commission. https://downloads.ctfassets.net/rb9cdnjh59cm/38niR1KQg3knFZBp7rMmwb/1458f67994b694bccca63d1e5bbbf9f1/COSO-Fraud-Risk-Management-Guide-2023.pdf
  25. [25] Beneish, M. D. (1999). The detection of earnings manipulation. Financial analysts journal, 55(5), 24-36. https://doi.org/10.2469/faj.v55.n5.2296
  26. [26] PricewaterhouseCoopers (Firme), & Everson, M. E. (2013). Internal control: Integrated framework. Committee of Sponsoring Organizations of the Treadway Commission. https://www.caat.or.th/wp-content/uploads/2019/01/COSO-Internal-Control-Integrated-Framework-2013.pdf
  27. [27] Doyle, J., Ge, W., & McVay, S. (2007). Determinants of weaknesses in internal control over financial reporting. Journal of accounting and economics, 44(1-2), 193-223. https://doi.org/10.1016/j.jacceco.2006.10.003
  28. [28] Ashbaugh‐Skaife, H., Collins, D. W., Kinney Jr, W. R., & LaFond, R. (2009). The effect of SOX internal control deficiencies on firm risk and cost of equity. Journal of accounting research, 47(1), 1-43. https://doi.org/10.1111/j.1475-679X.2008.00315.x
  29. [29] Ge, W., & McVay, S. (2005). The disclosure of material weaknesses in internal control after the Sarbanes‐Oxley Act. Accounting horizons, 19(3), 137-158. https://doi.org/10.2308/acch.2005.19.3.137
  30. [30] Krishnan, J. (2005). Audit committee quality and internal control: An empirical analysis. The accounting review, 80(2), 649-675. https://doi.org/10.2308/accr.2005.80.2.649

Downloads

Published

2025-06-16

Issue

Vol. 2 No. 3 (2025): Transactions on Quantitative Finance and Beyond

Section

Articles

License

Copyright (c) 2026 Transactions on Quantitative Finance and Beyond

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

How to Cite

Afsay, A., & Shafikhan, H. (2025). Senior Management Team Stability as a Hidden Factor in Audit Risk. Transactions on Quantitative Finance and Beyond, 2(3), 203-213. https://doi.org/10.22105/tqfb.v2i3.72
Crossref
Scopus
Google Scholar
Europe PMC

Similar Articles

1-10 of 37

You may also start an advanced similarity search for this article.