Wednesday, December 22, 2010

Why Do CFOs Become Involved in Material Accounting Manipulations?

By Mei Feng, Weili Ge, Shuqing Luo, Terry Shevlin @ HLS Forum.

While subject to these caveats, our paper contributes to the understanding of CFOs’ incentives when they face accounting manipulation decisions. Our findings suggest that CFOs are typically not the instigator of accounting manipulations. Instead, it appears that CEOs, especially powerful CEOs with high equity incentives, exert significant influence over CFOs’ financial reporting decisions. In other words, CFOs’ role as watchdog over financial reports is compromised by the pressure from CEOs. Overall, the findings of this study suggest a corporate governance failure for the accounting manipulation firms, and have important implications for current corporate governance reform. While researchers, practitioners, and regulators have generally concluded that stock-based compensation has provided managers with incentives to misstate accounting numbers, our results indicate that re-designing compensation packages for CFOs is not necessarily the only remedy. Improving CFO independence by alleviating the pressure of CEOs on CFOs could be critical to improving financial reporting quality. One possible way to achieve this would be to have boards or audit committees more involved in CFO performance evaluation and in hiring and retention decisions (Matejka, 2007).
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