Thursday, 23 December 2010

Why do CFO’s manipulate accounts?

A research paper described on the Harvard Law School Forum on Corporate Governance suggests that pressure from their CEO’s is the prime motivation for Chief Financial Officers of listed companies to manipulate their accounts. The pay and rewards of these executives does not seem to be enhanced by the manipulation but that of their CEO’s is enhanced. Also, prior to the manipulation there is an above average turnover of CFO’s in those companies where it has been detected, compared with a control group. The data all comes from the USA, but evidence from major financial scandals in other countries would suggest that the lessons are universal.

Of course we know little of manipulation that has avoided detection and the authors seem not to have tested for other motivations, such as deperate attempts to stave off corporate failure. Nonetheless, this is an important piece of work that reinforces the view that the majority of financial scandals result from over-dominant Chief Executives, without sufficient checks and balances on their behaviour, who treat company assets as their own.


  1. Brian,

    The CEO / CFO dynamic has always fascinated me.

    In my experience I have seen many times where the CFO is hired by the board to keep the CEO in check.

    When CFOs feel that they have a board that is supportive of proper corporate governance and ethics, they will go to the board and work to resolve the issue. Otherwise they are stuck between a rock and a hard place, and the pressure to cave in to the CEOs demands is difficult to overcome.

    Samuel Dergel, CA, CPA
    Senior Partner & Practice Leader, CFO Search

  2. Thanks Samuel for that thoughtful comment. I will post after Christmas with some personal experience and confession that illustrates some of the tough questions on this subject. In the meantime I'll just observe that while this Harvard research provides valuable insight I think there are plenty of occasions when it is the CFO who initiates manipulation - probably starting with wishful thinking and getting progressively sucked in to falsehood. That they derive no financial benefit from this is by-the-by.