Chief Financial Officers of Earnings-Restatement Firms Experience Higher Turnover, Study Finds

FAYETTEVILLE, Ark. – Accounting researchers at the University of Arkansas have found higher turnover rates and severe labor-market penalties for chief financial officers of so-called restatement firms – firms asked to restate their earnings – compared to a control group of similar firms.

In a study to be published in the Journal of Accounting, Auditing and Finance, the researchers also examined whether the passage of 2002 Sarbanes-Oxley Act, the federal law popularly referred to as SOX, had an impact on turnover and labor-market penalties imposed on CFOs of restatement firms. They discovered that Sarbanes-Oxley tightened reporting and accounting procedures in response to major corporate scandals, such as those at Enron and WorldCom, in the late 1990s and early 2000s. 

Sarbanes-Oxley implicitly assumed that accountability standards were too low and existing internal corporate governance mechanisms were inadequate, said Juan Manuel Sanchez, assistant professor of accounting in the Sam M. Walton College of Business.

“We found little evidence that the passage of SOX influenced CFO turnover rates, implying that internal corporate governance mechanisms were working reasonably well in the pre-SOX era,” Sanchez said.

However, the researchers found that CFOs have suffered greater labor-market penalties after Sarbanes-Oxley. In other words, CFOs associated with restatement firms had more difficulties finding similar positions with other firms or, in some cases, finding employment at all after the federal law was enacted.

“One of the intended effects of Sarbanes-Oxley was greater accountability for CFOs,” Sanchez said. “Our study indicates that this intention worked. We found that executives terminated in the post-SOX period have suffered greater labor-market penalties compared to the pre-SOX period. Clearly, a tarnished reputation was more costly for CFOs following the passage of SOX.”

Sanchez completed the study with doctoral student Adi Masli and colleagues at Texas Tech University and the University of Alabama. The researchers relied on basic information, such as company names and restatement announcement dates, from financial reports released by the General Accounting Office. With this information, they focused on occurrence of restatements for specified periods before and after passage of Sarbanes-Oxley. They also concentrated on the magnitude of the restatements, as measured in millions of dollars, and abnormal stock market reactions to restatement requests.

The researchers then identified CFOs that left their firms within 24 months of the restatement announcement. Then, through various news and employment databases, they tracked careers and determined subsequent employment status. From this information, Sanchez and his colleagues classified the former CFOs into categories:

• those who were able to find any job

• those who were able to find a job with a comparable title or better

• those who were able to find a job with a publicly traded firm

• those who were able to find a comparable job at a publicly traded firm

• those who faced severe penalties, such as incarceration or disbarment from serving as executives of publicly traded firms.

The findings are of interest to firms, shareholders and regulatory authorities, Sanchez said. The high-profile accounting scandals have changed roles faced by CFOs, who must maintain their integrity in the face of pressures from many internal and external constituents. They must also maintain the reputation necessary to communicate credibly with these diverse constituencies.