Managers from a financial background can fulfill operational roles admirably, according to a new study of corporate governance led by a University of Alabama business professor.
A notable development over the past two decades is financial officers considerably expanding their role in management, often assuming the additional position of chief operating officer. While this increase in CFO/COO combinations – and the resultant savings in C-suite salaries it has occasioned – is clear, the effect on companies’ operations and financial reporting is unclear.
A concern about a CFO/COO position include someone with specialized skills in accounting and finance taking over operation duties such as strategy implementation, handling disturbances, marketing, customer relations and research and development. Another issue could be that added responsibilities overburden the executive. Also, there is a concern mixing the roles of operations with financial reporting may create an incentive to use accruals to meet operational targets.
As the first research to shed light on this issue, a paper published in the current Journal of Management Accounting Research may allay concerns about expanded CFO roles.
“Learning that CFOs who take control of operations appear to do a reasonable job with operating decisions should be encouraging news for proponents of broad-based training among financial experts and to those accountants wishing to move beyond historic ‘number counting’ stereotypes,” the author wrote in the paper. “CFOs who are given operational control can effectively perform both roles.”
The study was led by Dr. Steve Buchheit, associate professor of accounting at UA. Co-authors on the paper from UA include Dr. Austin Lansing Reitenga, associate professor of accounting, and Daniel A. Street, an accounting graduate student. Also a co-author on the study is Dr. George W. Ruch, a three-time UA graduate and assistant professor of accounting at the University of Oklahoma.
The study’s findings derive from data involving a large sample of firms (438 with a CFO/COO and 3,100 with the positions separate) during the period 2000 through 2016. The research investigated differences between firms with combined CFO/COO roles and those with separate position in two key performance aspects, quality of operations and quality of financial reporting.
For financial reporting, the researchers examined how the firms handled discretionary accruals, or non-cash accounting items that involve some element of estimation and bring the potential for managerial manipulation. The study found firms with combined roles estimated better, as evidenced by positive discretionary accruals in one year and increased cash flow the next year.
To assess quality of operations, the researchers measured discretionary spending on items such as advertising and administrative expenses in one year against cash flow and return on assets the following year. Again, discretionary expenses can be manipulated to affect cash flow and profitability. The study found no evidence discretionary expenses influenced cash flow and return on assets at firms with combined roles differed from firms with separate positions.
This article was adapted from information provided by the American Accounting Association.