Iowa Ledger (2022) - Tippie College of Business

RESEARCH
The Case for the Chief Accounting Officer
BY • TOM SNEE
14 % ( )
The likelihood firms
with a CAO will have
to restate earnings
One of the biggest C-suite trends over the last decade has been the evolution of the
chief financial officer (CFO) into more of a strategic manager, which begs the question
of who on the executive team devotes their time to overseeing the financial reporting.
A recent study by Tippie College of
Business assistant professor Adrienne
Rhodes and her co-author, Dan
Russomanno of the University of Arizona,
finds that many firms elevate a chief
accounting officer (CAO) or controller to
the executive officer team. Overall, this
has been beneficial for firms that have
made the change, as those that elevate
their CAO to an executive officer position
tend to produce more reliable financial
statements than firms with a chief
financial officer only. Firms with this
reporting structure see a 14% decrease
in the likelihood of a restatement than
firms that have only a CFO, and the longer
the CAO is in place, the less likely a firm
will need to restate its earnings.
Rhodes and her co-author tracked the
executive officers in Form 10-K or proxy
statement filings of public firms between
2000 and 2016, some with CAOs, others
with only CFOs. They found other benefits
for those with CAOs or equivalent positions:
they made fewer accrual estimation errors
and unsigned total current accruals, and
corrected material weaknesses in internal
control more quickly.
They also found firms are most likely
to benefit from a CAO at the executive
officer level when there is more pressure
on executives’ time and attention, such
as those with more segments and
subsidiaries, and with more foreign
transactions. Since the CFO in many
firms has evolved into a position focused
more on strategic matters and firm
management, a CAO is able to give
financial reporting the time and attention
that a CFO may no longer have time for.
Since restatements are often seen as
signs of sloppy management, they can
lead to lower stock prices or greater
attention from regulators that will lower
the firm’s value. Rhodes says elevating
the CAO to an executive officer position
also has a kind of symbolism that could
build trust and firm value.
“The presence of a CAO may represent
a firm strategy to signal high financial
reporting quality to the market, and the
increased reliability of reporting from
a firm with a CAO may be driven by this
commitment,” she said. •
UNIVERSITY OF IOWA TIPPIE COLLEGE OF BUSINESS 11