Article2006

Does Hiring a New CFO Change Things? An Investigation of Changes in Discretionary Accruals

426 citations0/0 files storedThe Accounting Review

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

Abstract

The recent spate of fraudulent financial reporting in the U.S. has drawn attention to the fact that the Chief Financial Officer (CFO) has a substantial amount of control over a firm's reported financial results. This paper examines the changes in discretionary accruals surrounding the appointment of a new CFO. Using a sample of 712 companies that appointed a new CFO in the period 1994 to 2000, we find that discretionary accruals decreased significantly following the appointment of a new CFO. Our tests indicate that this reduction is significantly greater for our group of CFO-hiring firms than for a control group of non-hiring firms, and that the changes are not driven by a concurrent appointment of a new Chief Executive Officer (CEO). We also find that our results are largely driven by firms that hire a new CFO from outside the company. Our study extends earlier research by providing empirical evidence that individuals in CFO positions wield significant influence over the firm's reported financial results and that a firm's discretionary accruals are significantly reduced surrounding the appointment of a new CFO.

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References

1991Earnings Management During Import Relief Investigations 2005Performance matched discretionary accrual measures 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 2002Audit committee, board of director characteristics, and earnings management 1996Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*1997Earnings management to avoid earnings decreases and losses 2012Detecting Earnings Management

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