IFRS errors, CFOs’ Accounting Talent, Compensation and Turnover
42 Pages Posted: 12 Feb 2011 Last revised: 25 May 2011
Date Written: February 10, 2011
This paper builds on and contributes to the currently emerging literature on CFO’s compensation and turnover. We focus on the association between the CFO’s compensation and turnover and his/her “accounting talent.” We contend that the accounting talent of CFOs can be measured by accounting errors that occur when a country moves to the International Financial Reporting Standards (IFRS) by adopting a “big bang” approach, in which all firms have to adopt IFRS within the same accounting period without the opportunity of early or late adoption. We hand-collect eighteen different accounting errors for a sample of 280 Australian companies. These are then used to calculate the CFO’s accounting talent. We find (i) a positive relation between the CFO’s accounting talent and the CFO’s compensation ex ante in the transition year, (ii) a positive relation between the CFO’s accounting talent and the CFO’s bonus in the subsequent year (adoption year) and (iii) an inverse relationship between the CFO’s accounting talent and CFO turnover in the subsequent year (adoption year). Further tests on the Chief Executive Officer’s (CEO) accounting talent and compensation and alternative specifications of our variables confirm our results.
Keywords: Accounting Errors, CFO Compensation, CFO Turnover, International Financial Reporting Standards
JEL Classification: M51, M52
Suggested Citation: Suggested Citation