The Research Of The Relevance Between CFO Compensation And Earnings Management

In the context of modern corporate system, because of the separation of ownership and management in the listed company, the agency problems emerged. Based on the consideration of utility maximization of the managers, the accounting procedures and earnings may be changed by them. But the self-serving opportunistic behavior will seriously affect the authenticity of the company's financial reporting.CFO is the executive who is primarily responsible for financial management and accounting. They have the most closely relationship with the company's financial management. Compared with other executives, when have the same profit motive, CFO could increase their own compensation through earnings management behavior more convenient. Under the circumstance, in order to safeguard economic interests of the shareholders and the company, it requires a series of scientific and effective mechanisms to incite and restrict CFO.Based on the background above, the article chooses the listed companies of manufacturing both in Shenzhen and Shanghai Stock Exchange during the period through2006to2010as the research sample, and use the Modified Cross-section Jones Model to measure the discretionary accruals of the companies. The study verifies the relationship between the annual monetary salary of CFO and earnings management of listed companies, from the perspective of compensation incentive.The empirical results of the study show that:(1)the annual salary of CFO in the listed companies is proportional to the operating cash flows and the total accruals, it can be interpreted as that the CFO annual compensation of the listed company has been linked with the company's accounting surplus. In the compensation contract, earnings have been used for inciting and restricting the behavior of CFO. This is a major breakthrough of the corporate governance in China;(2) there is a significant positive correlation between CFO compensation and the discretionary accruals that is a part of the total accruals. However, there is no significant correlation between CFO compensation and nondiscretionary accruals. So we know that the compensation and earnings management has a significant correlation. And compensation contract would induce some earnings management behavior to a certain extent;(3) divided the sample according to the nature of the actual controller, we found that:for the non-state-owned listed companies, CFO has more strong incentive to manipulate accounting earnings to improve their compensation, compared with the state-owned listed companies.For further analysis of the listed companies' earnings, we found that when the companies'earnings have positive adjustment, there is a significant positive correlation between CFO compensation and the discretionary accruals; However, when the earnings are adjusted lower, there is no longer any correlation between CFO compensation and the discretionary accruals.