Accrual earnings management: Do Chief Financial Officer power and career horizon matter?

• Published date: 01 October 2022
• Author: Yahya Abdullah,Sandeep Nabar
• Date: 01 October 2022
• DOI: http://doi.org/10.1002/jcaf.22573

Received:  March  Accepted:  May 

DOI: ./jcaf.

RESEARCH ARTICLE

Accrual earnings management: Do Chief Financial Officer

power and career horizon matter?

Yahya Abdullah Sandeep Nabar

School of Accounting, William S. Spears

School of Business, Oklahoma State

University, Oklahoma, USA

Correspondence

Sandeep Nabar,  Spears School of

Business, Oklahoma State University,

Stillwater,OK , USA.

Email: sandeep.nabar@okstate.edu

Abstract

We examine whether Chief Financial Officer (CFO) internal power and career

horizon are associated with accrual earnings management. Our proxy for the

CFO’s power within the firm is the ratio of the CFO’scompensation to the CEO’s

compensation, and the CFO’s career horizon is proxied by the number of years

to retirement age. We find a negative relationship between the CFO’s internal

power and discretionary accruals. We do not find any evidence that CFO career

horizon impacts accrual management. We further find that the negative asso-

ciation between CFO internal power and discretionary accruals is evident only

for income-decreasing accruals, and only in firms that meet or just beat earnings

forecasts. The evidence implies that CFOs exert their influence to ratchet down

large positive earnings surprises, thereby creating cookie jar reserves for future

years.

KEYWORDS

accrual earnings management, CFO, CFO career horizon, CFO power, Chief Financial Officer

1 INTRODUCTION

Earnings management is the purposeful misrepresenta-

tion of the firm’s true financial performance. Accrual

earnings management occurs when managers strategically

exercise discretion over reporting choices to manipulate

their firms’ profits (Healy & Wahlen, ). Although

managers can engage in accrual earnings management

within GAAP limits, research finds that firms soon run

out of that option and subsequently inflate their earnings

fraudulently (Perols & Lougee, ). In addition, earnings

management adversely affects the market value and per-

ception of the firm (Karpoff et al., ). In this paper,

we examine whether two specific Chief Financial Offi-

cer (CFO) attributes, namely power within the firm and

career horizon, are associated with firms’ accrual earnings

management.

CFOs oversee the financial reporting process within

their firms. In many cases, the CFOs’ incentives and objec-

tives might not be the same as those of their CEOs. While

CEOs are frequently under pressure to deliver favorable

financial performance in the short term, CFOs may be tar-

geting more long-term goals, like becoming future CEOs.

Moreover, earnings management-related risks also differ

between CFOs and CEOs. Forexample, if a firm is forced to

restate its earnings, the CFO will face severe consequences

by virtue of having been in charge of preparing the mis-

stated financial statements. Unlike CEOs, CFOs cannot

claim lack of expertise. The negative consequences to the

CFO range from legal costs to loss of both current employ-

ment and potential job opportunities. While a significant

body of research examines CEOs’ influence on earnings

management, the research (reviewed in the next section)

on how CFO attributes relate to earnings management is

sparse.

Using panel data, we regress discretionary accruals on

the CFO’s internal power, the CFO’s career horizon, and

control variables for various executive and firm-specific

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