CFO’s personal style shapes a firm’s financial reporting

The exacting rules and rubrics that govern financial reporting seem to preclude any stylistic interpretations.

It turns out, that’s not the case. According to new research from the University of Washington Foster School of Business, the individual style of a chief financial officer (CFO) has a significant impact on the way his or her firm goes about reporting its financials. The more discretion and the higher job demands a CFO faces, the greater the effect of CFO style on the firm’s accounting choices.

“In addition to firm-specific characteristics that have been documented in prior research,” says co-author Weili Ge, “we find that CFO styles are an important determinant of accounting choices.”

Fungible accounting

The Foster research team—Ge, an assistant professor of accounting, Dawn Matsumoto, an associate professor of accounting, and Jenny Li Zhang, a doctoral student (since graduated)—tracked 359 serial CFOs, searching for patterns of behavior across different firms and over time.

They define “style” as a CFO’s individual characteristics that arise from natural disposition, personal situation and prior experiences, among other factors. In this context, degree of aggressiveness is the focus. While past studies have documented the effect of a CFO’s style on investment and acquisition decisions, this is the first to take up financial reporting—a primary function overseen by the CFO.

Financial reporting affords a surprising amount of discretion. A firm’s accounting choices are often seen as heavily constrained by the requirements of external audits, Securities and Exchange Commission (SEC) regulations and Generally Accepted Accounting Principles (GAAP). But within GAAP there are indeed gaps. Room to maneuver.

“Many rules within GAAP require judgment,” says Matsumoto. “There’s always a tension in accounting between reporting fact versus reporting information that is forward-looking, information that’s useful to investors. This requires estimation.”

Estimation is subject to style. And Ge, Matsumoto and Zhang find that a CFO’s style—aggressive or conservative—tends to remain consistent over time and at successive companies.

CFO style also has no correlation to age, gender or education. “Having an MBA, for instance, does not make a CFO more likely to be more or less aggressive,” Matsumoto says. “Personal style seems to be innate.”

Style doesn’t change

It also appears to be immutable. Ge says a CFO’s aggressive or conservative style is likely to manifest itself regardless of firm culture or financial incentives.

So, when corporate boards attempt to affect a certain style of financial reporting by adding incentives to their CFO’s compensation package—they may be going about it the wrong way.

“The fact that CFOs’ accounting choices are impacted by their individual styles potentially complicates firms’ ability to obtain optimal reporting choices via financial incentives alone, unless the CFO’s style is aligned with the firm’s preferences,” Matsumoto says.

“When a board of directors makes hiring decisions, it should take a CFO’s personal style into consideration,” adds Ge. “Our research suggests that style matters to accounting decisions.”

Do CFOs Have Style? An Empirical Investigation of the Effect of Individual CFOs on Accounting Practices” is the work of Weili Ge and Dawn Matsumoto of the University of Washington Foster School of Business, and Jenny Li Zhang, now an assistant professor of accounting at the University of British Columbia. It is forthcoming in Contemporary Accounting Research.