Why do CFOs become involved in material accounting manipulations?

Feng, Min; Ge, Weili; Luo, Shuqing; Shevlin, Terry

doi:10.1016/j.jacceco.2010.09.005

Cited by 425 publications

(183 citation statements)

References 41 publications

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“…The orchestrators are less likely to be CPAs or auditors, which suggests that the accountant does not direct the fraud, but his participation is necessary to achieve it. 20 Our results for CPAs are inconsistent with Feng, Ge, Luo, and Shevlin (2011), who find that CFOs at AAER firms are more likely to be CPAs than are CFOs at non-AAER firms.…”

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confidence: 66%

Executive Overconfidence and the Slippery Slope to Financial Misreporting

Schrand

Zechman

2011

SSRN Journal

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A detailed analysis of 49 firms subject to AAERs suggests that approximately one-quarter of the misstatements meet the legal standards of intent. In the remaining three quarters, the initial misstatement reflects an optimistic bias that is not necessarily intentional. Because of the bias, however, in subsequent periods these firms are more likely to be in a position in which they are compelled to intentionally misstate earnings. Overconfident executives are more likely to exhibit an optimistic bias and thus are more likely to start down a slippery slope of growing intentional misstatements. Evidence from a high-tech sample and a larger and more general sample support the overconfidence explanation for this path to misstatements and AAERs. Forthcoming: Journal of Accounting and EconomicsAbstract A detailed analysis of 49 firms subject to AAERs suggests that approximately one-quarter of the misstatements meet the legal standards of intent. In the remaining three quarters, the initial misstatement reflects an optimistic bias that is not necessarily intentional. Because of the bias, however, in subsequent periods these firms are more likely to be in a position in which they are compelled to intentionally misstate earnings. Overconfident executives are more likely to exhibit an optimistic bias and thus are more likely to start down a slippery slope of growing intentional misstatements. Evidence from a high-tech sample and a larger and more general sample support the overconfidence explanation for this path to misstatements and AAERs.

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confidence: 66%

Executive Overconfidence and the Slippery Slope to Financial Misreporting

Schrand

Zechman

2011

SSRN Journal

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“…Finally, a number of recent studies argue that the Chief Financial Officer (CFO) often has as much influence over the firm's financial reporting as the CEO, if not more (e.g., Feng, Ge, Luo, and Shevlin, 2010;and Jiang, Petroni, and Wang, 2010). The Sarbanes-Oxley Act of 2002 highlights the important role the CFO plays in the firm's financial reporting, in that the act requires both the CEO and CFO to personally certify the material accuracy and completeness of the firm's financial information and disclosures.…”

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The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting

Armstrong¹,

2010

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Abstract:We review recent literature on the role of financial reporting transparency in reducing governance-related agency conflicts among managers, directors, and shareholders, as well as in reducing agency conflicts between shareholders and creditors, and offer researchers some suggested avenues for future research. Key themes include the endogenous nature of debt contracts and governance mechanisms with respect to information asymmetry between contracting parties, the heterogeneous nature of the informational demands of contracting parties, and the heterogeneous nature of the resulting governance and debt contracts. We also emphasize the role of a commitment to financial reporting transparency in facilitating informal multi-period contracts among managers, directors, shareholders, and creditors.Keywords: financial accounting; corporate governance; board structure; contracting; executive compensation; debt contracts; informal contracts We thank the following for helpful comments and suggestions:

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“…For example, Coles et al (2006) report that delta reduces risky investment but increases stock volatility. Brockman, Martin, and Unlu (2010), Chava and Purnanandam (2010), and Panousi and Papanikolaou (2012) also suggest delta reduces risk-taking incentives, while Feng et al (2011) find a positive relationship between delta and financial misreporting and Armstrong and Vashishtha (2012) find that delta increases stock volatility. This literature generally explains these mixed results by arguing that delta provides two opposing risk-taking incentives and therefore the overall effect is ambiguous.…”

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confidence: 97%

Risk-Return Tradeoffs and Managerial Incentives

Tsui

2015

SSRN Journal

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Moral hazard theory posits that managerial risk aversion imposes agency costs on shareholders, and firms respond by providing risk-taking incentives to mitigate these costs. The underlying assumption in this literature is that increasing shareholder value requires increasing risk, yet there is limited empirical evidence supporting this assumption or the role of such risk-return tradeoffs in incentive compensation design. Using measures based on the firm's stock price, I find that shareholder value increases with risk, consistent with managerial risk aversion imposing agency costs on shareholders. I also find that firms provide managers with more risk-taking incentives when this risk-return relation is more positive and thus potential risk-related agency costs are more severe. This finding is strongest among firms where value increases with idiosyncratic rather than systematic risk, consistent with theory that these agency costs arise primarily from managers' exposure to idiosyncratic risk. Overall, these results are consistent with firms designing managerial compensation contracts to mitigate risk-related agency costs. Additional findings highlight that the incentives from equity-based compensation depend on the risk-return tradeoffs that managers face, providing one explanation for the conflicting results in prior literature regarding the incentives from managerial stock price exposure. Degree Type DissertationDegree Name Moral hazard theory posits that managerial risk aversion imposes agency costs on shareholders, and firms respond by providing risk-taking incentives to mitigate these costs. The underlying assumption in this literature is that increasing shareholder value requires increasing risk, yet there is limited empirical evidence supporting this assumption or the role of such risk-return tradeoffs in incentive compensation design. Using measures based on the firm's stock price, I find that shareholder value increases with risk, consistent with managerial risk aversion imposing agency costs on shareholders. I also find that firms provide managers with more risk-taking incentives when this risk-return relation is more positive and thus potential risk-related agency costs are more severe. This finding is strongest among firms where value increases with idiosyncratic rather than systematic risk, consistent with theory that these agency costs arise primarily from managers' exposure to idiosyncratic risk. Overall, these results are consistent with firms designing managerial compensation contracts to mitigate risk-related agency costs. Additional findings highlight that the incentives from equity-based compensation depend on the risk-return tradeoffs that managers face, providing one explanation for the conflicting results in prior literature regarding the incentives from managerial stock price exposure. Doctor of Philosophy (PhD)Graduatev

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Why do CFOs become involved in material accounting manipulations?

Cited by 425 publications

References 41 publications

Executive Overconfidence and the Slippery Slope to Financial Misreporting

Executive Overconfidence and the Slippery Slope to Financial Misreporting

The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting

Risk-Return Tradeoffs and Managerial Incentives

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