Business Gets Personal For CFOs

Are CFOs Without Board Status More Honest?

Apr 16, 2018
Accounting
As Featured In 
Contemporary Accounting Research

Is a senior executive more likely to sugarcoat how well the firm is doing if that person sits on the company’s board of directors?

New research from Emanuel Zur, assistant professor of accounting and information assurance at the University of Maryland’s Robert H. Smith School of Business, finds that the executive’s status with the board of directors does indeed have an impact.

Zur and his co-authors studied the effect of personal litigation risk on disclosure and accounting decisions, using the Gantler v. Stephens court case from the Delaware Supreme Court as a basis for the experiment. The court’s ruling says that corporate officers who don’t serve on the company’s board of directors can potentially be held personally liable for breaching their fiduciary duty to the firm.

The researchers specifically studied the companies’ chief financial officers, largely because, they are the corporate officers who are, they say, “most likely to influence disclosure and accounting decisions.” The researchers say they wanted to investigate “how the ruling affects their choices.”

They compared compare firms with CFOs who do not serve on their firm’s board of directors to firms with CFOs who do serve on their firm’s board of directors. And they found that after the 2009 Gantler ruling, firms with CFOs not serving on the board have been more likely to disclose negative news early and more likely to report more conservative financial statements. However, the two groups show no statistically significant contrast in accrual earnings management practices.

The research also shows that non-board member CFOs “use a more negative tone during earnings announcements conference calls,” the researchers say. “Taken together, our results suggest that CFOs have a significant influence on firms’ disclosure decisions and respond to personal litigation risk over and above corporate litigation risk.”

Read more: The Effect of CFO personal Litigation Risk on Firms' Disclosure and Accounting Choices is featured in Contemporary Accounting Research. 

About the Author(s)

Emanuel Zur

Emanuel Zur, PhD, Assistant Professor of Accounting and Information Assurance, joined the faculty this fall 2013. Prior to joining Maryland's AIA faculty, Emanuel was an assistant professor of accounting at Baruch College and a visiting assistant professor at MIT's Sloan School of Management. He holds an LLB in law and a BA in economics from Tel-Aviv University in Israel, as well as an MPhil in management, and a PhD in business administration (accounting) from New York University's Stern School of Business. Before entering academia, Emanuel worked as a consultant for EY and as a lawyer for one of the leading law firms in Israel.

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