Earnings quality and CFO financial expertise

Abstract

Scope and Method of Study: Financial reporting is a central issue in the capital markets. As financial reporting is mainly the responsibility of chief financial officers (CFOs), the characteristics of a CFO potentially affect the quality of financial reporting in general, and the quality of earnings in particular. This study investigates if there is an association between earnings quality and CFO financial expertise. Using a sample of the S&P 1500 firms in the year 2005, this study examines if the presence of CFOs with a CPA license, an advanced degree in business, and more CFO experience affects the attributes of earnings.

Findings and Conclusions: This study finds that when hiring a CFO, larger firms put more emphasize on the importance of an advanced degree in business, while smaller firms are more likely to hire a CFO with a CPA license. Recently appointed CFOs are more likely to be a CPA and/or have an advanced degree in business, confirming claims that following the Sarbanes-Oxley Act (SOX), the recent trend is for public firms to hire CFOs with better financial expertise. CFOs with a CPA tend to be younger than those without the certification. Among the expertise variables, CPA is the one with the strongest effects on earnings quality. The results show that the variable CPA improves earnings persistence and earnings informativeness, and reduces earnings conservatism.