The Role and Responsibilities of the CFO: Implications for Reporting Quality, Firm Value, and Incentive Compensation

• In Event: Financial Reporting and Corporate Governance

Abstract

CFOs wear many hats, as the primary agents responsible for financial reporting and control and as strategic partners within firms' top management teams. This paper uses an agency model to investigate how the role and responsibilities of the CFO affect reporting quality, firm value, and incentive compensation. In the model, a risk-neutral principal hires the risk-averse CEO and CFO. The CEO is mainly responsible for production, while the CFO is responsible for financial reporting and productive activities. Furthermore, the CEO and CFO may act independently or can collaborate. Several results contribute to the academic and practitioner literatures, highlighting the importance of CFO responsibilities besides financial reporting. Results also contradict existing practitioner literature that espouses universal benefits to having a CFO who is a strategic partner in the top management team.

Author

• Henry Friedman, University of California, Los Angeles