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CFOs Exit Restating Companies, Study Finds

But they overwhelmingly tend to resign rather than get fired, companies report.
David M. Katz, CFO.com | US
March 23, 2011

Restatements of financial reports usually convey bad news about a company to the stock market, and CFOs, as chief stewards of financial reports, tend to like nothing less than bearing such tidings. In fact, when companies restate, their finance chiefs show a pronounced tendency to leave, new research confirms. Usually, however, it's their own decision to walk — or at least that's what the companies are reporting.

From 2005 to 2009, companies in general had a 14.88% to 19.47% chance of having a CFO departure in a given year, according to Audit Analytics, a data-research firm. But the situation changed dramatically for companies that filed a restatement. In such cases, the probability of a finance chief leaving in the period beginning three months before and ending nine months after a restatement rose to a range of 19.06% to 28.99%.

The finance chiefs mostly resigned, rather than receiving pink slips. Overall, the companies studied had a resignation rate of between 14.45% and 18.57%, while the restated companies experienced a rate from 18.06% to 27.68%. (The researchers looked at a total of 48,200 10-K filers that also filed an audit opinion over the five-year period.)

Companies rarely report that they have dismissed a CFO regardless of the reason, according to the Audit Analytics report, CFO and Auditor Departures Occurring Near the Issuance of a Restatement. Overall, companies experienced a dismissal rate ranging from 0.40% to 0.99% over the five-year period. If the companies filed a restatement, the chance of a finance chief's dismissal jumped to between 1.00% and 1.30% — a very large difference, but involving very low numbers.

"What a CFO can take out of this [study] is that the chance of getting fired and having it shot out as an 8-K disclosure really doesn't increase near the occurrence of a restatement," says Donald Whalen, the firm's director of research.

CFO Departures

But are all those finance chiefs actually leaving on their own? While Whalen says that such information generally can't be gleaned from financial statements, he grants that CFOs threatened with dismissal might negotiate with their employer to have the move reported as a resignation. The "You can't fire me, I quit" scenario may also exist in some cases.

A company, however, has an interest in not reporting turmoil in its senior ranks. To report a resignation rather than a dismissal is usually preferable, says Whalen, because "at least it shows a better relationship than companies that come right out and say, 'Hey, we kicked this guy out.'"

CFOs might also want to take pains to avoid certain types of restatements rather than others. Restatements involving revenue recognition tend to have an especially malign effect on share prices, while those involving corporate cash flow rarely make a dent, according to Whalen.

As is the case with CFOs, companies and their auditors tend to sever relations more frequently during a restatement, according to the Audit Analytics report. For all the companies studied, the departure rate varied from 10.19% to 15.69% during the five-year period. But among those filing restatements, the departure rate rose to between 20.79% and 25.75%.

Auditor Departures


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