In February Kevin Krakora, finance chief of Diebold, a maker of security systems and voting machines, found out he would receive no bonus, stock awards, or merit-based salary increase. The company had been forced to restate its results and revise its revenue-recognition policies after an investigation by the Securities and Exchange Commission. For Krakora, who in 2006 earned a $320,000 salary and $381,635 in stock awards, the consequences of restatement were personally costly. And he’s far from alone.
Companies that restate their earnings have substantially higher rates of involuntary CFO turnover, a new study by four college professors shows. And since the Sarbanes-Oxley Act was passed in 2002, these departing finance chiefs also have faced a tougher time on the job market, say the professors, Denton Collins of the University of Memphis, Austin Reitenga of the University of Alabama, and the University of Arkansas’s Juan Manuel Sanchez and Adi Masli.
The authors surveyed 167 firms that restated earnings downward before Sarbox and 197 after it was enacted. They focused on CFOs who were fired within two years of the restatement and tracked their career progress for the next four years. The study also compared the restating companies with a control group of similar companies that did not restate. The result was some fascinating numbers.
The authors were surprised to find that Sarbox made little difference in the incidence of involuntary turnover. Both before and after the act was passed, a restatement increased the rate of involuntary turnover by four to five times. In the post-Sarbox period, 53 percent of CFOs who left their post after a restatement did so involuntarily. In the case of CFOs who left companies that later restated, only 13 percent of departures were involuntary, about the same rate found in the control group of companies that did not restate.
But Sarbox has had devastating consequences for the ability to find new work after being terminated by a company that restated. The authors tracked such CFOs for up to four years after they were terminated. The percentage of those who were able to find any job at all did not decline all that much: from 54 percent before Sarbox to 47 percent after. However, finding a comparable job — defined as CFO or better — became much more difficult: 37 percent were able to do that before Sarbox, but only 17 percent after. “Firms are less willing in the post-Sarbox period to hire a former CFO with a tarnished reputation,” the authors write. “This appears to be consistent with the intent of the legislation to increase executive accountability.”
The chances are even poorer of finding a comparable job at a public company, where reputations matter more. Penalties for violating Sarbox — criminal charges, restrictions from serving as an officer of a public firm, the loss of a CPA license — create blemishes that are hard to ignore.
The increased relevance of the CFO as the CEO’s “chief lieutenant” has come with added scrutiny, the paper concludes. “The reputational effects of being implicated in an accounting misstatement can be potentially devastating to the subsequent career path of the executive,” the authors write. Such results are not surprising to John Wilson, head of J.C. Wilson Associates, a San Francisco–based CFO search firm. He does allow that culpability for a restatement is not always clear-cut, and his firm examines the extent of the CFO’s involvement in any mistakes. However, “anybody is going to look very closely at an SEC,” says Wilson. “If the SEC has looked at you, that’s not a good thing.”