How Do Financial Executives Respond To Adverse Accounting Experiences?

Monetary executives who expertise a major accounting-related occasion appear to be taught their lesson, in keeping with a analysis research forthcoming within the The Accounting Overview.

In a research titled “The Impact of Managerial Opposed Expertise on Monetary Reporting” researchers recognized 661 senior monetary executives who skilled a major hostile accounting-related occasion. The hostile experiences included monetary reporting litigation, restatements of monetary statements, SEC investigations, and sophistication motion lawsuits. The researchers then examined the monetary reporting attributes of these executives’ subsequent corporations earlier than and after the manager was employed into the senior administration crew. The article is authored by Thomas Kubick from the College of Nebraska-Lincoln and Yijun Li of Erasmus College.

For the 661 senior monetary executives examined within the research, the most typical positions have been CFO and Controller. Different positions included Treasurer and Chief Accounting Officer. The typical age of the executives was simply over 50 years outdated and 89% have been male. The interval examined by the research was from 1993 to 2015.

“We have been thinking about figuring out if executives who skilled accounting-related issues at a former firm have been kind of prone to expertise related issues at their subsequent employer,” say Kubick. On the one hand, a CFO or controller from a troubled firm might deliver an aggressive accounting stance to their new firm. Then again, the manager might have realized his or her lesson and never need to expertise one other hostile accounting-related occasion.

The research’s outcomes have been in keeping with adaptive studying idea or, extra informally, the “scorching range” impact. Monetary executives burned by an accounting difficulty previously have been extra prone to be conservative with their accounting at their subsequent employer. The research additionally observes that their new corporations are much less prone to expertise a future accounting restatement or SEC investigation.

Li notes that “Our outcomes recommend that the impact of hostile accounting-related expertise can have a persistent impact on subsequent habits. Our findings are even stronger when the manager’s prior hostile accounting expertise was more moderen or if the expertise led to a extra extreme profession consequence for the manager. Extra salient experiences appeared to have a better impact on monetary reporting.”

“The potential results of prior skilled experiences, in our case hostile accounting occasions, shouldn’t be missed. We offer proof that monetary executives related to prior accounting issues usually are not apt to repeat the efficiency at their subsequent employer. Whether or not expertise interacts with different managerial traits or incentives can be a doubtlessly fruitful space for future analysis,” concludes Kubick.