Article2005

The Financial Expertise of CFOs and Accounting Restatements

Jagadison K. Aier · Joseph Comprix · Matthew T. Gunlock · Deanna Lee

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

We investigate whether the characteristics of chief financial officers (CFOs) are associated with accounting errors (using accounting restatements as a proxy). We investigate several metrics of financial literacy similar to those suggested for members of audit committees by the NYSE-NASD Blue Ribbon Committee. These metrics include years of work as a CFO, experience at another company, advanced degrees (like M.B.A.s), and professional certification (like a CPA). We use a logit model to test whether the likelihood of an earnings restatement is related to the above metrics of financial literacy (measured at the date of the original accounting error). Restating and non-restating companies during the period 1997–2002 were matched on year, industry, and company size. Overall, our results are consistent with restatements being negatively associated with the CFO's financial expertise. Specifically, we find that companies whose CFOs have more work experience as CFOs, M.B.A.s, and/or CPAs are significantly less likely to restate their earnings.

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References

1996Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*2004Audit Committee Characteristics and Restatements 2005Corporate Governance and Accounting Scandals 2003Determinants of market reactions to restatement announcements 2004Auditor Independence, Non‐Audit Services, and Restatements: Was the U.S. Government Right?*1989Characteristics of firms correcting previously reported quarterly earnings

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2010Financial executive qualifications, financial executive turnover, and adverse SOX 404 opinions 2012Abnormal Audit Fees and Restatements 2009Reducing Restatements with Increased Industry Expertise*2012CEO Age and Financial Reporting Quality 2011CEO Involvement in Selecting Board Members, Audit Committee Effectiveness, and Restatements*2013A comparison of alternative measures of organizational aspirations 2014Trust and Financial Reporting Quality 2010

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