Is a Restatement a CFO’s Kiss of Death?

Study by U. of Alabama professors finds a far higher turnover rate among restating finance chiefs than among those who don’t restate. But how much higher?

Companies that restate earnings change CFOs much more frequently than non-restating companies do, according to a study by two University of Alabama professors. But exactly how much more frequently turns out to be a matter of some confusion.

The report, titled “Corporate Governance Consequences of Accounting Scandals: Evidence from Top Management, CFO, and Auditor Turnover,” found that nearly a 10 percentage point gap exists between the adjusted turnover rate for finance chiefs at companies reporting lower earnings in a restatement (50.4 percent), compared to CFOs at non-restating companies (40.46 percent). Among CEOs, the difference using the same “regression model” was 14 percent (46.17 percent versus 31.73 percent).

Perhaps more surprising is the calculation that audit firms are no more likely to be replaced by a company that restates than by a non-restating company, according to the report, which was drafted in March and last revised this month by professors Anup Agrawal and Tommy Cooper, of the university’s Culverhouse College of Business.

Some readers of the report, however, have paid more attention to the raw statistics, before the adjustment, showing that 65 percent of finance chiefs depart companies after restatements, and that 53 percent of CEOs depart under the same circumstances. “If you are a manager, chief financial officer or auditor working for a company that comes out with a restatement, start looking for another job. That’s the only conclusion you can draw” from the new study, observed Leon Gettler, a business journalist for Australia’s The Age newspaper, writing for the corporate-finance Website.

(When contacted by, Gettler conceded in an email that, after the departure levels at the control group were registered, the 10-point and 14-point actual departure-rate differentials for CFOs and CEOs are less impressive than the numbers on which he had based his comment. “But the bottom line is that their position is less secure post restatement,” he responded. “And if the market reaction to the restatement is severe, it would be even less secure because the board wants to be seen as doing something. Sacking the CEO or CFO is one way of achieving that.”)

Among non-restating companies in the study’s control group — again following the raw numbers — 43 percent of CFOs and 34 percent of CEOs were replaced during the period studied, while overall turnover involving members of top management measured 59 percent. The University of Alabama professors explain in the report, however, that to give a fair comparison of turnover, they needed to apply “logistic regressions that control for other determinants of management turnover.” That calculation includes the normal turnover rate for non-restating firms.

“Our study focuses on two important outcomes of the functioning of internal governance mechanism, namely management and auditor turnover, during a time of intense corporate turmoil,” they write in the study. They note the disruption in corporate accounting that followed the scandals involving Enron, WorldCom, Tyco International, HealthSouth and other companies, and the resulting reforms of the Sarbanes-Oxley Act of 2002.


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