On The Effect Of CFO’s Prior Experience As An Auditor And Affiliation With Accounting Firm On Accounting Conservatism Of Listed Companies

Public accounting is often a steppingstone to other careers. One common path forauditors is to move into CFO (Chief Financial Officer) positions of listed companies.The professional prudence, as auditors’ basic ethics and professional quality, will affectthe auditors’ cognition, risk preference and values. The professional habitual thoughtwhich is brought into the listed company by the auditor will influence the CFO’sdecision-making process, thereby affecting the company’s financial behavior and thequality of accounting information. On the one hand, the prudent attitude may promoteCFO to have a natural tendency of prudently processing and reporting accountinginformation to improve the accounting conservatism of company. On the other hand,what is also a possible thing is that CFO takes his advantages of the professionalknowledge and anti-auditing capability to make more covert financial fraud, reducingthe conservatism of the company’s financial reporting.Furthermore,“CFO-auditor affiliation”, as a special form in the case of CFO whohas a prior audit experience, may undermine audit independence due to “the threat ofclose relationship”, leads to the reduction of accounting conservatism. On the other side,it may contribute to improve the company’s accounting conservatism when the CFOanticipates that the current auditors will perform stricter audit procedures.To identify the effect of CFO’s prior experience as an auditor and affiliation withaccounting firm on accounting conservatism of listed companies, this paper, bases onthe CFO change events in China’ A-share market between the2002-2011which werecollected manually, uses two models from Basu (1997) and Ball&Shivakumar (2005),and studies the issues discussed above. First, we tested the two transverse relationshipsafter listed companies changed their CFOs. Second, we did vertical empirical tests toeach sample to have a clearer understand of the two relationships. Finally, we added thesample of “indirect job-hopping” into the original samples to examine and analyzerelated issues again. The main conclusions of the research are:(1) CFOs who have priorexperience as auditors can improve the accounting conservatism of listed companies;(2)CFOs who have affiliations with accounting firm can improve the accountingconservatism of listed companies;(3) CFO’s professional prudence which hasdeveloped in the auditing career will may be weakened as time goes on after the auditor leaves accounting firm.According to the research, we consider that:(1) the positive effect of CFO’s priorexperience as an auditor and affiliation with accounting firm on listed companies canprovide some basis when companies are employing CFOs.(2) Market participants(especially investors) can judge the quality of accounting information of listedcompanies to make the right investment decisions, based on the signal of whether thecompany employs a CFO who has an auditor experience.(3) The affiliation betweenCFO and accounting firm is not necessarily a "bad thing", thus the relevant regulatoryagencies may not have to limit or prohibit such employment practices, but to make moreappropriate policies to promote companies to improve its quality of accountinginformation.