Title: Why Do Chief Financial Officers Become Involved in Material Manipulations?

Author: Mei Feng, Weili Ge, Shuqing Luo, Terry Shevlin
Journal: Journal of Accounting and Economics

Introduction
A significant portion of the United States citizenry has been either directly or indirectly affected by corporate accounting scandals. A majority of citizens have followed them in the news. Below is a list of some of the highly publicized scandals in recent times that directly involved Chief Financial Officer involved accounting manipulations: Company Name /Year | What? | How? | Waste Management- 1998 | Company reported 1.7B in fake revenue. | Falsely increased depreciation time length for property, plant and equipment. | Enron - 2001 | Shareholders lost over 74B; thousands lost retirement accounts. | Did not report large amounts of debt on the balance sheet. | WorldCom - 2002 | Falsely reported assets by over 11B. | Underreported expenses by capitalizing rather than direct expensing; fake accounting entries. | Freddie Mac - 2003 | Misreported over 5B in earnings. | Intentionally misstated and overstated earnings. | AIG - 2005 | Stock price manipulation; over 3.9B in accounting fraud. | Loans were recorded as revenue; colluded with traders to inflate stock prices; sent clients to other insurers that AIG had monetary agreements with. | Lehman Brothers- 2008 | Reported over $50B of loans as sales. | Sold assets to the Cayman Islands and told them Lehman would eventually by them back. They went bankrupt and never did. | Madoff- 2008 | Stole over 64.8B from investors. | Through a Ponzi Scheme. |
Source: Accounting-degree.org
These highly publicized and economy crippling scandals could only have been orchestrated with Chief Financial Officers involvement. The article discusses why Chief Financial Officers become involved in material accounting manipulations. The authors offer two scenarios which explore the reasons this occurs: 1. Are Chief Financial Officers the instigators for personal gain?
Or
2. Are Chief Financial Officers a puppet for the Chief Executive Officer and manipulate the accounting data under duress?
The authors state their conclusion by providing and analyzing four hypotheses and theories. Extensive tests and data are collected to prove or disprove each hypothesis. Data is carefully analyzed using control samples in these articles which lead to compelling conclusions.
Analysis of Data
The authors test the first hypothesis that material accounting manipulations by Chief Financial Officers are a result and tied to monetary bonuses or incentives. Data collected from 1982 to 2005 reveal that incentives are not materially different from the Chief Financial Officers of the control sample. Through this analysis it is concluded that higher equity incentives are not the catalyst for material accounting manipulation. A rational assumption would point to greed as the driver for a Chief Financial Officer to falsify accounting documents for personal gain. The data collected and analyzed showed no correlation between Chief Financial Officer incentives and fraud.
Conversely, the authors test hypothesis two that Chief Financial Officers of companies with material accounting manipulations receive higher bonuses or incentives than Chief Financial Officers of non- manipulating companies (Feng, et al, 2011). The data concluded that there were direct correlations between incentives and material accounting manipulation. This hypothesis displays the power of increasing personal wealth and greed of Chief Financial Officers regardless of the costs or ethics. The Securities and Exchange Commission laws require clear, concise and understandable disclosure about compensation paid to Chief Financial Officers and certain other high-ranking executive officers of public companies (www.SEC.gov). According to the Bureau of Labor Statistics, Chief Financial Officers on average earn 61% of the salary of the Chief