The real effects of disclosure regulation: Evidence from mandatory CFO compensation disclosure

The 2006 SEC rule, by changing the definition of Named Executive Officers, mandates CFO compensation disclosure. Using this setting and a difference-in-differences research design, we study the real effects of CFO compensation disclosure regulation on CFO job performance. We hypothesize that the disclosure of CFO compensation information, by facilitating shareholder monitoring of the board in providing appropriate incentives to CFOs, leads to better CFO job performance in providing high-quality financial reports. The analyses support our prediction: the treatment firms, which start disclosing CFO compensation information under the 2006 rule, compared to the control firms, which already disclose CFO compensation before 2006, experience an improvement in CFO performance, as exhibited in decreases in accounting misstatements and unexplained audit fees. The results are more pronounced for firms with concentrated ownership, smaller compensation committees, and CFOs subject to weaker monitoring by audit committees. Overall, we provide evidence of a real effect resulting from mandatory CFO compensation disclosure.     

Effective board monitoring over earnings reports and forecasts: Evidence from CFO outside director appointments

Prior evidence that firms adjust their board structure following accounting restatements suggests that firms expect the board to effectively monitor the firm’s financial accounting system. However, little is known about signals firms use to identify monitoring weaknesses or the types of individuals firms appoint to improve the quality of monitoring. We expand on Ghannam, Bujega, Matolcsy, and Spiropolous (2019)’s evidence that firms appoint directors with accounting experience after financial fraud by investigating whether firms that file restatements or issue highly inaccurate earnings forecasts appoint individuals with CFO experience (i.e., a subset of accounting experts) to their audit committee. We find that firms are more likely to appoint an outside director with CFO experience to the audit committee when they have recently restated earnings and when they have higher prior management forecast error. We also find that the appointment of a CFO outside director to the audit committee is followed by a lower likelihood of restatement and more accurate management forecast. Together, our results suggest that firms respond to accounting failures by appointing outside directors with CFO experience. Thus, we provide insight into the signals firms use to identify weaknesses in the monitoring of the accounting function and the types of expertise firms value in addressing those weaknesses.     

Family firm disclosure and accounting regulation reform in the Middle East: The case of Jordan

We examine the quality of accounting disclosures by family firms using mandatory and voluntary disclosures as proxies for the quality of disclosure. We find that family firms comply more fully with mandatory disclosure requirements than do non-family firms but they disclose significantly less voluntary information. We also document that the enhanced accounting regulation improves the strength of the association between family ownership and mandatory disclosure compliance. Another important finding is the greater disclosure, both mandatory and voluntary, for firms with high family ownership compared to firms with low family ownership.     

Cash flow disaggregation and the prediction of future earnings

We examine the incremental information content of the components of cash flows from operations (CFO). Specifically the research question examined in this paper is whether models incorporating components of CFO to predict future earnings provide lower prediction errors than models incorporating simply net CFO. We use Australian data in this setting as all companies were required to provide information using the direct method during the sample period. We find that the cash flow components model is superior to an aggregate cash flow model in terms of explanatory power and predictive ability for future earnings; and that disclosure of non‐core (core) cash flows components is (not) useful in both respects. Our results are of relevance to investors and analysts in estimating earnings forecasts, managers of firms in regulators’ domains where choice is provided with respect to the disclosure of CFO and also to regulators’ deliberations on disclosure requirements and recommendations.     

The association between characteristics of audit committee accounting experts,audit committee chairs,and financial reporting timeliness

We investigate the association between audit committee (AC) members' financial expertise and financial reporting timeliness, and extend the discussion by investigating how the source of accounting expertise (e.g., public accounting or CFO) differentially influences financial reporting timeliness. We predict and find that AC accounting financial expertise is associated with timelier accounting information. Further, we find that accounting expertise gained from public accounting experience is associated with timelier financial reporting; however, accounting expertise gained from CFO experience is not. We also find that AC chairs (ACCs) with accounting expertise from public accounting experience are significantly associated with timelier financial reporting while ACCs with CFO-sourced accounting expertise are not. Our results are important for two reasons. First, our results suggest that AC accounting financial expertise contributes to AC effectiveness by improving the timeliness of financial information. Second, our findings highlight how personal characteristics of accounting financial experts influence contributions toward AC effectiveness.     

Can Management Turnover Restore the Financial Statement Credibility of Restating Firms? Further Evidence

This paper investigates the association between management turnover following financial restatements and the probability of subsequent restatements. We find that restating firms that replace management (CEO and/or CFO) are more likely to restate their financial statements again. We also find that subsequent restatements are mainly attributable to the new management. Overall, our results suggest that management turnover following restatements may not be an effective mechanism to remediate financial restatements, but the change to a new management results in a greater possibility of lower earnings quality (i.e., higher probability of subsequent financial restatements and accruals‐based earnings management). Our study supports prior literature's findings that the change in the top management leads to organizational instability and higher accounting information risk. Our findings have implications for internal decisionmaking with regard to top executive replacement.     

非财务信息披露与分析师预测——基于深市上市企业社会责任报告的实证检验

以深市上市企业披露的社会责任报告作为非财务信息的替代变量,实证检验了非财务信息披露质量与分析师盈利预测的关系。多元回归分析结果表明,企业社会责任报告披露质量越好,其分析师盈利预测越精确,并且在财务透明度低的企业中,这种正向关系更显著。这说明社会责任报告披露的这类非财务信息对分析师预测不仅具有信息含量,而且能够通过对财务信息的补充作用,缓解财务不透明对分析师预测精度的不利后果。     

Financial Distress and the Earnings‐Sensitivity‐Difference Measure of Conservatism

Following Basu (1997 ), the difference between the sensitivity of accounting earnings to negative equity return (proxy for bad news) and its sensitivity to positive equity return (proxy for good news) is interpreted as an indicator of conditional accounting conservatism. However, there is concern that the earnings‐sensitivity difference (ESD) may be affected by factors other than conditional conservatism, and that this may impair its reliability as an indicator of conditional conservatism. Motivated by such concerns and by recognition that financial distress could contribute to an ESD through a conditional‐conservatism route and/or through a non‐conditional‐conservatism route, we examine the association between financial distress and the ESD for U.S. non‐financial firms. By decomposing the association into an element arising from accruals, which can reflect conditional conservatism, and an element arising from cash flow from operating activities (CFO), which cannot directly reflect conditional conservatism, we seek evidence as to whether such association arises through a conditional‐conservatism route or through a non‐conditional‐conservatism route. We find that positive association between financial distress and the ESD arises predominantly through the accruals component of earnings rather than the CFO component, consistent with it arising primarily because of a higher degree of conditional conservatism in relatively financially distressed firms. The inference that there is a positive association between financial distress and conditional conservatism is supported by other non‐equity‐return‐based measures of conditional conservatism. The evidence in this paper suggests that the effect of financial distress does not significantly impair the reliability of the ESD as an indicator of conditional conservatism.     

CEO/CFO characteristics and financial reporting quality: A review

This study reviews the literature on the association between different facets of CEO/CFO characteristics and the properties of accounting information. The review is organized around three broad themes, namely, the association between financial reporting quality and CEO/CFO turnover, the effect of managerial overconfidence on financial reporting outcomes, and finally the effect of CEO/CFO gender on reporting outcomes. This review illustrates the importance of considering CEO/CFO characteristics as an important determinant of financial reporting outcomes. This study offers insights to policy makers interested in enhancing the governance function to enhance the credibility of financial reporting. The review informs regulators that designing governance structure disregarding CEO/CFO characteristics may not bring desired benefits.     

Financial Expert CEOs and Earnings Management Around Initial Public Offerings

This study examines the association between financial expert CEOs and earnings management (EM) around initial public offerings. We identify financial expert CEOs as those having past experience in either banking or investment firms, large auditing firms, or finance-related roles. We find strong evidence that newly listed firms with financial expert CEOs are less likely to engage in either accrual-based or real EM in the offering year than those with non-financial expert CEOs. In particular, our results are robust after controlling for the potential selection issue that occurs due to non-random matching of CEOs to firms. In addition, we employ alternative measures of financial expertise, including past experience in a CFO position, financial experience variety, and professional qualifications. We document that CEOs who used to work as CFOs and those who gained varied financial experience are less likely to manage earnings through both accruals and real activities. Moreover, CEOs who have a professional qualification in finance and/or accounting are also associated with lower accrual-based EM.     

CFO Narcissism and Financial Reporting Quality

We investigate the effect of CFO narcissism, as measured by signature size, on financial reporting quality. Experimentally, we validate that narcissism predicts misreporting behavior, and that signature size predicts misreporting through its association with narcissism. Empirically, we examine notarized CFO signatures and find CFO narcissism is associated with more earnings management, less timely loss recognition, weaker internal control quality, and a higher probability of restatements. The results are consistent for within‐firm comparisons focusing on CFO changes and are robust to controlling for CFO overconfidence and CEO narcissism. The results highlight the importance of CFO characteristics in the domain of financial reporting decisions.     

CFO Fiduciary Responsibilities and Annual Bonus Incentives

We examine how firms design bonus plans of their CFOs. CFOs participate in decision making much like other executives, but they also have significant fiduciary responsibilities for reporting firms' financial results. Responsibility for financial reporting raises the question of whether it is appropriate to pay CFOs annual bonuses contingent on self-reported financial performance. In this paper, we provide a framework that characterizes CFO bonuses as a tradeoff between CFOs' decision-making responsibilities and their fiduciary duties over financial reporting. This framework yields a number of implications that we examine empirically using a proprietary survey of CFO compensation practices of public and private firms. Our main finding shows that from 2003 to 2007 public entities (relative to private entities) reduced the percentage of CFO bonuses contingent on financial performance. We interpret this result as evidence that firms mitigate misreporting practices in part by deemphasizing CFO incentive compensation.     

Regulating the timing of disclosure: Insights from the acceleration of 10-K filing deadlines

We study the effects of regulating the timing of disclosure on the quality of accounting information, using a 2003 US regulatory change that accelerates 10-K filing deadlines as a research setting. Employing a difference-in-differences design, we find that the likelihood of issuing financial statements that are later restated increases for firms that are required to file more quickly, relative to firms whose filing practices are not affected by the regulatory change. This effect is particularly pronounced during the audit busy season, when auditors also face significant time pressure. These results are consistent with a tradeoff between how quickly accounting reports are required to be filed and the reliability of the resulting reports.     

Differential levels of disclosure and the earnings-return association: evidence from foreign registrants in the United States

Foreign companies listing on U.S. exchanges are required to report financial information under U.S. GAAP on form 20-F using either Item 17 or Item 18 disclosure rules. These two disclosure rules differ in that Item 17 allows many exemptions from U.S. GAAP, while Item 18 requires disclosure of all financial information in accordance with U.S. GAAP. This study examines the differential earnings-return association between Item 17 and Item 18 filers.We find significantly higher earnings-return associations for Item 18 filers than for Item 17 filers. While the earnings-return association of Item 18 foreign firms is not different from that of matched U.S. firms (which fundamentally use Item 18 rules), the earnings-return association of Item 17 foreign firms is significantly lower than that of matched U.S. firms. Overall, the results are consistent with the idea that higher levels of disclosure may be related to lower discount rates and higher earnings response coefficients (ERCs).     

CAP Forum on Enron: Former Audit Firm Personnel as CFOs: Effect on Earnings Management*

Corporate hiring of former audit personnel to fill key financial positions is a practice that has attracted attention from the media, the accounting profession, and regulators. The concern is that the former external auditor who now holds a key position with the client may be able to circumvent the audit or exert pressure on the audit team and adversely influence audit quality. We compare a sample of 172 test companies that appointed to the position of chief financial officer (CFO) personnel who are former employees of the companies' auditors, with a control sample of companies that appointed new CFOs who were not affiliated with their auditors. We investigate whether the level of discretionary accruals is greater for the test sample compared with the control sample during the two years following appointment of the CFO. Both univariate and multivariate results for signed discretionary accruals suggest some support for the hypothesis that firms with affiliated CFOs are associated with greater earnings management than firms with unaffiliated CFOs. Furthermore, the results for signed discretionary accruals suggest that the association is stronger for nonpartners who moved from the audit firm to the client with little or no time gap. On average, the results for absolute discretionary accruals do not suggest differences in earnings management between affiliated and unaffiliated CFOs. However, they do indicate some earnings management relative to unaffiliated CFOs by CFOs who had little or no time gap between leaving the audit firm and joining the client firm, although at a weaker level of significance.     

CEO职业关注与企业会计信息披露质量

依据2001-2019年沪深两市A股上市公司数据,以C EO年龄水平作为职业关注水平的代理变量,考量CEO职业关注对企业会计信息披露质量的影响.结果表明:CEO职业关注降低了企业的会计信息披露质量,CEO职业关注水平较高时,企业盈余管理倾向更强,应计质量更差,发生盈余粉饰的可能性更高.进一步分析发现,企业正向盈余管理倾向是C EO职业关注影响会计信息披露质量的渠道,职业关注与会计信息披露质量的关系受到财务业绩压力的干扰.     

Can CFOs resist undue pressure from CEOs to manage earnings?

Building upon the premise that, under certain conditions, the ability of the Chief Executive Officer (CEO) to pressure the Chief Financial Officer (CFO) is limited, we develop a measure of CFO resistance that captures the ability of the CFO to resist undue pressure from the CEO to manage earnings. In doing so, we consider various sources of power for both the CEO and CFO, and a market setting where CFO resistance is perceived to be high. We find that firms with resistant CFOs are less likely to engage in earnings management than firms with non-resistant CFOs, ceteris paribus. Additionally, while confirming prior evidence that CEOs with strong incentives are more likely to manage earnings, we show that this effect is significantly less pronounced in the presence of resistant CFOs. Overall, our findings suggest that firms can improve the quality of financial reporting by creating conditions that enable CFO resistance.     

Do stock prices reflect undisclosed financial statement information? Evidence from the OTCBB

I exploit a regulatory change that mandated that Over-the-Counter Bulletin Board (OTCBB) firms must comply with the reporting requirements of the 1934 Securities Exchange Act. I use this change to examine the association between equity values and financial statement data in voluntary and mandatory disclosure environments. Before the change, disclosure of financial statement information was voluntary for most of these firms. I study firms that initiate SEC filing after the change and classify them as disclosing and nondisclosing based on whether they voluntarily disclosed financial statement information before the regulatory change. In these firms’ initial SEC filings after the eligibility rule, they retroactively disclose financial statement information for the year prior to compliance with the rule. Thus I can observe previously withheld financial data. I find that the choice to voluntarily disclose is negatively associated with firm characteristics related to proprietary costs and with situations in which accounting information plays a less important role in resolving information asymmetry. For nondisclosing firms, I find evidence that equity values reflect financial statement data, even though this information was not publicly available, and that compliance with mandatory SEC disclosure requirements strengthens this association. For disclosing firms, I find evidence that suggests investors viewed their voluntary disclosure of financial statement data as credible and fail to find evidence that compliance with mandatory reporting requirements enhances this association.     

Extreme Uncertainty and Forward‐looking Disclosure Properties

This study investigates the effect of extreme uncertainty on disclosure behaviour by analyzing the quality and quantity of forward‐looking disclosures during the global financial crisis and pre‐crisis periods, controlling for other determinants of disclosure behaviour. Prior research has struggled to distinguish between the quality and quantity dimensions of forward‐looking disclosures. Also, the impact of the recent financial crisis on these forward‐looking disclosure attributes has not yet been examined systematically. We address this gap by exploiting the unique setting of German publicly traded firms. These firms must provide forward‐looking information within their audited financial statements, although relevant regulation is sufficiently vague to allow great variation in the quality, scope and quantity of forward‐looking disclosures actually observed. Using hand‐collected data from 2005 to 2009, we provide evidence of a significantly negative association between crisis and disclosure quality. This finding is robust to several different disclosure quality proxies and regression specifications. In contrast, we find no negative significant relation between crisis and disclosure quantity; rather, there is evidence that reported volume increases during the crisis. Our results are consistent with extreme uncertainty, as occurring during times of crisis, negatively affecting the quality of voluntary disclosures, while firms maintain or increase disclosure quantity, ultimately diluting the information density of forward‐looking disclosures.     

Changes in the value relevance of accounting information over time: Evidence from the emerging market of China

We investigate the changes in the value relevance of accounting information among Chinese firms over the past two decades, during which accounting reforms are launched to provide decision makers with increased disclosure and higher quality financial information. We also investigate the factors that differentiate firms showing significant value relevance improvement from firms showing little improvement. We find increases in the value relevance of some financial variables and decreases in others, which suggests that accounting numbers help to explain the pricing process of stock shares although at different levels. In addition, we find that value relevance improvements are more pronounced for smaller firms, firms with lower growth rates, and those with greater asset tangibility. We also document that value relevance improvements are generally lower in an exuberant stock market. These results have implications for a variety of information users and policy makers in emerging countries which are reforming their accounting systems.