One of the biggest C-suite trends over the last decade has been the evolution of the chief financial officer (CFO) into more of a strategic manager, which begs the question of who on the executive team devotes their time to overseeing the financial reporting.
A recent study by Tippie College of Business Assistant Professor Adrienne Rhodes and her co-author, Dan Russomanno of the University of Arizona, finds that many firms elevate a chief accounting officer (CAO) or controller to the executive officer team. Overall, this has been beneficial for firms that have made the change, as those that elevate their CAO to an executive officer position tend to produce more reliable financial statements than firms with a chief financial officer only. Firms with this reporting structure see a 14% decrease in the likelihood of a restatement than firms that have only a CFO, and the longer the CAO is in place, the less likely a firm
will need to restate its earnings.
Rhodes and her co-author tracked the executive officers in Form 10-K or proxy statement filings of public firms between 2000 and 2016, some with CAOs, others with only CFOs. They found other benefits for those with CAOs or equivalent positions: they made fewer accrual estimation errors and unsigned total current accruals, and corrected material weaknesses in internal control more quickly.
They also found firms are most likely to benefit from a CAO at the executive officer level when there is more pressure on executives’ time and attention, such as those with more segments and subsidiaries, and with more foreign transactions. Since the CFO in many
firms has evolved into a position focused more on strategic matters and firm management, a CAO is able to give financial reporting the time and attention that a CFO may no longer have time for.
Since restatements are often seen as signs of sloppy management, they can lead to lower stock prices or greater attention from regulators that will lower the firm’s value. Rhodes says elevating the CAO to an executive officer position also has a kind of symbolism that could build trust and firm value.
“The presence of a CAO may represent a firm strategy to signal high financial reporting quality to the market, and the increased reliability of reporting from a firm with a CAO may be driven by this commitment,” she said.