Behind the Research

But the story behind the research is nearly as interesting as the findings themselves.

Teasing out the personal impacts that an individual finance chief might have on the financial reporting process, for one thing, required differentiating personal factors from any decisions resulting solely from regulations and company characteristics. So the researchers started by analyzing only CFOs who had worked at two different publicly-held firms for at least two years each. That way, the professors could look at decisions made at each firm under both the CFOs in the study, as well as the actions taken at each firm under different CFOs. The focus was to try to determine whether the CFOs consistently selected accounting policies that were above or below the mean at each firm.

The team also controlled for extraneous factors, such as firm size and leverage ratio. "In this way, we could do a thorough job of disentangling the CFO effect from firm factors," Ge explains in the CFOworld interview.

The researchers analyzed six specific areas --- split between two general groups of factors -- in which CFOs have some discretion. The first group included tools that chief financial officers can use to achieve financial reporting goals. Those three tools were discretionary accruals, the use of operating leases, and the expected rate of return on pension assets. The second group of factors included earnings measures that typically signal some managerial intervention: earnings smoothing, meeting or beating analysts' expectations, and what the study refers to as what's known as an F-score -- a scaled probability that signals the likelihood of earnings management.