Now that CEOs and CFOs must vouch for financial reports under Sarbanes-Oxley regulations, what happens to these leaders when the reports prove faulty and figures must be restated?
Accountancy Professor Jeffrey Burks has studied the disciplinary actions that corporate boards have taken since SOX was passed in 2002. After eliminating cases where obvious fraud was involved— boards would have little choice other than to fire an executive here—Burks found the following trends after a restatement:
According to Burks, these actions make sense from the board’s point of view, especially since many of the post-SOX restatements covered minor issues. Removing a talented and powerful CEO is costly and disruptive to operations. But CFOs may seem easier to replace at a lower overall productivity cost to the company. By taking some action, the board shows diligence.
This disciplinary trend could improve financial reporting by giving CFOs more incentive to closely monitor accounting, but may make the CFO post less desirable, Burks concludes. Burks’ research is forthcoming in the Journal of Accounting and Public Policy.