November 25, 2019

“Not OK, Boomer”: Younger CFOs Curb Older CEOs’ Earnings Management?

Anybody interested in a little C-suite soap opera today?  I’ve recently stumbled across a number of studies addressing various aspects of the CEO-CFO relationship, and since it’s a slow news day, I thought it might be kind of fun to blog about a couple of them.  The first item is a recent study that found that younger CFOs may deter earnings management activities by older CEOs, which in turn results in lower audit fees.  Here’s an excerpt:

CEO-CFO career heterogeneity suggests that younger non-CEO executives have different career concerns and career goals with the pre-retirement CEOs. Therefore, younger non-CEO executives are less likely to be cooperative with pre-retirement CEOs on earnings management behavior. We find a negative and significant association between audit fees and CEO-CFO career heterogeneity.

The results suggest that auditors perceive CEO-CFO career heterogeneity as a favorable factor of firms’ internal governance and therefore may decrease audit risks. Further, we find that firm’s financial performance, as well as the corporate governance, moderates the relationship between audit fees and CEO-CFO career heterogeneity.

So, if you want to lower the risk of your audit & the size of your fees, hire a millennial CFO to keep a lid on your boomer CEO’s desire to live a little dangerously.

Audit Fees: The Cost of Conflict Between CEOs & CFOs

On the other hand, you also need to make sure your CEO & CFO get along, because if they don’t, another study says you’re likely to pay higher audit fees. Here’s an excerpt from that one:

We investigate the relation between audit fees and differences in CEO and CFO personality traits. Audit fees should reflect engagement risk associated with a client. This risk is likely influenced by the client’s top management team’s personalities and how they differ. For example, top management teams that experience more disagreement about key strategic decisions may pose higher risks to auditors. We proxy for CEO-CFO conflict by using differences in CEO and CFO “Big Five” personality traits. We examine whether these personality differences help explain audit fees after controlling for other determinants of audit fees in the literature.

We find that CEO-CFO personality differences are positively associated with audit fees, consistent with auditors assessing risk from conflicting personalities in the C-suite.

The study does say that the effect of a personality clash between the CEO & the CFO on audit fees can be mitigated by the number of years they’ve worked together, the company’s corporate governance practices & the tenure of its auditor.

But before you decide to send your CEO & CFO to couples therapy, it turns out that a little personality conflict isn’t always a bad thing.  As I blogged over on, another recent study says that the winning combination for M&A appears to be a visionary, upbeat CEO paired with a CFO who’s always reading to pour cold water on the CEO’s fever dreams.

November – December Issue: Deal Lawyers Print Newsletter

This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:

– How the Type of Buyer May Affect the Target’s Remedies in a Public M&A Deal
– The Risks of Not Strictly Complying with a “No Shop” Clause
– When Passive Investors Drift into Activist Status

Remember that – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

John Jenkins