The Financial Expertise of CFOs and Accounting Restatements

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.

Abnormal audit fees and future restatements: evidence from Tehran Stock Exchange

“…2 Factors related to the management and corporate governance characteristics, including the financial expertise of the CFOs (Aier et al, 2005); diffuse ownership of the firms (Defond and Jiamblavo, 1991); Manager's conservative attitudes (Hay and Sandefur, 2007); the adoption of aggressive accounting policies as a result of capital market pressures (Richardson et al, 2002), and managers' demand for meeting industry standards as well as the income or sale estimations of the market analysts.…”

“…Indeed, the authors show that a restatement, having removed some uncertainty about the firm's earnings, might actually create additional uncertainty about the remaining financial statements, and the perceived credibility and competence of management. In a comparative study conducted by Aier et al (2005), the financial statements of restating and non-restating companies matched on year, industry and company size were analysed. Specifically, the authors' results suggest that companies whose CFOs have more job experience as CFOs, MBAs, and CPAs are significantly less likely to restate their earnings.…”

“…Next, we remove the residuals from the audit fee model and include them as an independent variable in the second regression model where we seek to find the possible relationship between ABAFEE and financial restatements (REST) (Richardson et al, 2002;Aier et al, 2005;Romanus, 2007;Blankley et al, 2012). The restatements model is presented as follows.…”

The Relationship Between Segment-Level Manipulations And Audit Fees

“…Broadly, classification management involves the re-classification of financial statement items for the purpose of enhancing certain performance measures, such as core earnings, without changing bottom-line net income. 2 Account manipulation to improve the perception of the firm has been extensively discussed and researched. 3 Classification smoothing was the focus of McVay's (2006) research which showed that managers will shift expenses out of operating income to more transitory "special items."…”

The Relationship between an Independent Audit and Financial Reporting Quality: Evidence from Small Private Commercial Banks

“…As a company grows they may need to seek out financial experts because of the lack of in house financial expertise (Aier et al 2005). We use change in total assets to -37 -proxy for growth (GR).…”