The Hindu Business Line : Move on CFO

Worldwide, the post of the Chief Financial Officer (CFO) in an organisation has become a lucrative but dangerous one with the eagle eyes of the regulators on them all the time. The spate of corporate-governance-led legislation has added to the responsibilities of the person manning the post and are unforgiving of any error. Auditors have become extremely careful, which puts an additional burden on the CFO to ensure that the financial results get the nod from directors, shareholders and auditors. However, in the event that something goes amiss or even on a status-quo basis, would the hiring of a new CFO change things? Marshall A. Geiger and David S. North of the University attempted a research on this.

As implied by the new certification requirements, if individuals appointed as CFOs are in a position to affect significantly the reporting of their company's financial condition, then a change of guard may well lead to different financial results to be reported under similar business conditions. Accordingly, they investigated the relationship between appointing a new CFO and the changes in a company's reported discretionary accounting accruals surrounding this turnover event.

If a CFO has the ability to effectively shape the financial information reported, then the exercise of this influence would be manifest in changes in a company's reported discretionary accounting accruals surrounding the change in personnel.

Thus, an examination of changes in discretionary accruals around the hiring of a new CFO offers empirical evidence to the ability of individual CFOs to affect significantly their firms' reported financial statements. They sampled 712 companies that appointed a new CFO over a period of six years.

Findings of study

They found that, compared to non-hiring firms, discretionary accruals are significantly reduced surrounding the arrival of a new CFO. Further, their results are not confounded by the appointment of a new CEO during their CFO turnover examination period. Also, firms not appointing a new CEO during their examination period reported significant reductions in discretionary accruals while firms concurrently appointing a new CEO exhibited no significant reduction in discretionary accruals compared to non-hiring firms.

However, their results on joint CEO and CFO turnover may be because they included all types of CEO changes . Their results also indicate that companies appointing individuals to the position of CFO that come from external sources report reductions in discretionary accruals, while companies appointing CFOs from within do not report similar reductions. They also find that firms hiring CFOs directly from their external audit firm, or from any other CPA firm, do not report any differences in the pattern of discretionary accruals reductions than other CFO appointments.

Although their conclusions could be different, their research seems to suggest that change could help. With mandatory rotation of partners, and so on, becoming the norm, the day could not be far off when companies would encourage mandatory changing of their CFOs. While some CFOs themselves are switching jobs at the earliest next lucrative opportunity, the rest could get used to the fact that change is the only constant in life.

(The author is a Hyderabad-based chartered accountant.)

More Stories on : Accountancy | Courts/Legal Issues

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The sugar policy muddle

Need for speed on the reform road

Fear of prosecution

Move on CFO

High levels of derivative exposure

Chocolate teacakes or `unjust enrichment'

Smoke 'n mirrors

These Special Uneconomic Zones

The man who made Hitler wait

"Judicial deal"

Save oil