Former Audit Firm Personnel as Cfos: Effect on Earnings Management
Posted: 12 Jan 2004
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.
Using corporate SEC filings, we compare a sample of 172 test companies that appointed personnel who were former employees of the companies' external auditors, to the position of CFO, with a control sample of companies that appointed new CFOs that were not affiliated with their auditors. We investigate whether earnings management (measured by the level of discretionary accruals) is greater for the test sample compared to 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 without affiliated CFOs. Further, the results for signed discretionary accruals suggest that the association is stronger for non-partners who moved from the audit firm to the client with little or no time gap. The results for absolute discretionary accruals do not suggest differences, on average, in earnings management between affiliated and unaffiliated CFOs. However, they do indicate some earnings management relative to unaffiliated CFOs by CFOs who were formerly non-partners and who had little or no time gap between leaving the audit firm and joining the client firm, although at much weaker levels of significance.
Keywords: Former Auditors, CFOs, Earnings Management, Accruals
JEL Classification: M41, M43, M49
Suggested Citation: Suggested Citation