Why do CFOs Become Involved in Material Accounting Manipulations?*

Abstract:     
This paper investigates why CFOs become involved in material accounting manipulations. To address this question, we examine various costs and benefits for CFOs who are associated with the manipulations in order to test two explanations: (i) CFOs instigate the earnings manipulations for immediate personal financial benefit, versus (ii) CFOs acquiesce to CEOs’ pressure to manipulate earnings. Consistent with CFOs being acquiescent, we find that CFOs bear higher litigation cost yet reap less financial benefit than CEOs using a comprehensive sample of material accounting manipulations disclosed between 1982 and 2005. CFOs are more likely to be charged by the SEC for accounting manipulations than CEOs. Regarding financial benefit, while CEOs of manipulation firms have higher pay-for-performance sensitivity than CEOs of matched non-manipulating firms, CFOs of manipulating firms have similar pay-for-performance sensitivity to other non-CEO executives of manipulating firms and to CFOs of the matched firms. Moreover, we find that accounting manipulations are more likely when CEO power is high. Finally, our AAER context analyses suggest that CEOs of manipulation firms are more likely than CFOs to be described to have orchestrated the manipulation and to be ordered to disgorge financial gains from the manipulation. Taken together, our findings are consistent with the explanation that CFOs are involved in material accounting manipulations because they succumb to CEO pressure, rather than because they seek immediate personal financial benefit.

Keywords: earnings quality, accounting manipulation, CFO turnover, CEO power, incentive compensation

JEL Classifications: G34, G38, M41, M43, K22

Working Paper Series