CEO/CFO Forced Turnover in Response to the SEC’s Enforcement Actions on Financial Misrepresentation after SOX

• In Event: Financial Accounting and Reporting 6

Abstract

This study examines the relationship between CEO/CFO forced turnover and the SEC’s enforcement actions in response to CEOs’/CFOs’ financial reporting misconduct after SOX. Our findings show that in response to financial reporting misconduct in both the pre-SOX and the post-SOX periods, forced resignations occur at a significant rate for CEOs identified as culpable. On the contrary, CEOs orchestrating the financial misrepresentation are not significantly forced to resign while CFOs carrying out the scheme are. Worsening this anomaly, when CEOs and CFOs team up for orchestrating the financial misconduct, they are significantly less likely to resign involuntarily. However, culpable CEOs barred from serving as an officer/a director and culpable CFOs found lying to auditors are forced to resign. Also, culpable CEOs are forced to resign when faced with criminal charges and class-action lawsuits and culpable CFOs are forced to resign when fraud firms restate earnings and file bankruptcy. Additionally, independent directors resign to topple culpable CEOs and when serving actively on boards that expel culpable CFOs.

Authors

• Jui-Chin Chang, Texas A&M International University

• Cynthia Beatrice Lloyd, Texas A&M International University

• Huey-lian Sun, Morgan State University