This study provides direct testing of the effects of two forms of CEO social influence pressure on actual CFO’s reporting decisions. Examining such pressures improves the overall understanding of an individual’s decision to engage in dysfunctional behavior, which can inform auditors and audit committee members who provide oversight of the financial reporting process and have responsibility for mitigating the risk of financial misreporting.
Bishop, C. C., F. T. DeZoort and D. R. Hermanson. 2017. The Effect of CEO Social Influence Pressure and CFO Accounting Experience on CFO Financial Reporting Decisions. Auditing: A Journal of Practice and Theory 36 (1): 21 – 41.
CFOs play critical stewardship roles related to financial reporting quality and a prominent and increasing role in accounting manipulations, particularly in conjunction with their CEO. This study examines how CEO pressure on the CFO and CFO accounting experience influence public company CFOs’ financial reporting judgments and decisions.
The authors conducted an experiment involving a hypothetical CFO’s earnings manipulation decision. Using a between-subjects manipulation, they utilize three levels of CEO pressure (a control group where the CEO does not pressure the CFO, a compliance pressure group where the CEO asks the CFO to revise an estimate, and an obedience pressure group where the CEO tells the CFO to revise an estimate).
The author of this article believes that this book should be on the “must read” list of researchers interested in audit committees and financial reporting, regardless of their research approach. For qualitative researchers, the book not only provides valuable insights into the on-process dynamics in reaching financial reporting decisions, but it is also a textbook example of how a researcher may conduct multiple case studies in accounting and gain access to key individuals in organizations to obtain private information about the financial reporting process. For empirical and experimental researchers, the book provides explanations that could be useful in developing their theoretical framework and raises many issues that could be researched in the future. The book should also be of interest to regulators, auditors, accountants, and students who are interested in the financial reporting process and the impact of recent regulation on this process.
Bédard, J. 2012. Reaching Key Financial Reporting Decisions: How Directors and Auditors Interact. Accounting Review 87 (5): 1819-1820.
The book, Reaching Key Financial Reporting Decisions: How Directors and Auditors Interact by Vivien Beattie and Stella Fearnley, explores how chief financial officers (CFOs), audit committee chairs, and audit engagement partners resolve issues that have given rise to interactions, discussions, or negotiations, between two of these three participants. It is a follow-up of Behind Closed Doors (Beattie et al. 2001), which received the Deloitte/American Accounting Association’s Wildman Medal in 2007. The book provides an update of the 1999 results in the 2007/2008 U.K. regulatory environment that, as the U.S. one, has undergone significant change since 1999. The book consists of two parts.
Reading each case is very interesting; it provides the reader with information that normally stays behind “closed doors.” The advantage of a book, compared to a journal article, is that there is more space to provide detailed information about the cases. With approximately 30 pages per case, the reader has a good understanding of each case. Even then, sometimes the author wanted to know more about the interaction issues.
This article is a book review.
The last part of the book presents the cross-case analysis of the 50 interactions using the framework developed in Beattie et al. They find that the key influence on the interaction outcomes has changed significantly since the previous study. The influence of the general company/audit firm context and specific context of the interaction is greatly reduced, while the national regulatory regime now has the strongest influence on the interaction (events, strategies, outcomes, and consequences). In the “new” regulatory environment, it appears that the higher threats from various regulatory agencies as seen by the CFO, audit partners, and audit committee chairs encourage compliance with accounting and auditing standards.
Whether readers need to read Behind Closed Doors to understand this new book depends on their interests. If readers are interested in how directors and auditors currently interact in reaching financial reporting decisions, the current book would be self-sufficient. However, if readers are interested in how the process has evolved over time, reading Behind Closed Doors would be useful.
These results have implications for boards when deciding on the appointment or replacement of insiders to the board. Specifically, since only a few non-CEO executives can be granted a board seat, the board should carefully consider which executive would enhance the effectiveness of the board. The results demonstrate that the CFO can enhance board effectiveness with respect to the quality of the financial reports. Yet, the results also show that CFOs who serve on the board are more entrenched. Therefore, boards should carefully consider whether the benefits of appointing the CFO to their board outweigh the costs.
Bedard, J. C., Hoitash, R., and Hoitash, U. 2014. Chief Financial Officers as Inside Directors. Contemporary Accounting Research 31 (3): 787-817.
Chief financials officers possess specialized knowledge and play a key role in the current economic and regulatory environment. This is the first study to distinguish a specific board insider, the CFO, from other insiders based on that officer’s specific knowledge and role within the corporate hierarchy. The authors investigate the association between the inclusion of a company’s chief financial officer on its board of directors with financial reporting quality and with CFO entrenchment. They examined first how financial reporting quality is affected by board membership of the CFO based on two contrasting perspectives. The first is consistent with the agency theory that a board seat provides officers with power and influence; thus, there could be negative consequences from reduced board independence associated with officer appointments. With CFOs on the board, the authors could observe lower financial reporting quality among companies making this choice. On the other hand, the CFO can positively contribute to board effectiveness by improving mutual advice and collaboration. Companies should perform better in those areas relating to CFO functions. The second concern is the risk of entrenchment at the cost of investors.
The authors used a sample of 7,034 firm year observations. The study sample is based on companies included in the Audit Analytics governance database for 2004 through 2007. The main results are reported using two-stage models. The first stage addresses factors associated with the presence of the CFO on the board, and the second stage tests the association of CFO board membership with financial reporting quality, CFO compensation, and turnover.