An Analysis of Unity of Command in Financial Reporting and Operations: Are CFO / COOs Effective?

• In Event: Forecasting, Accruals, and Benford's Law

Abstract

We examine situations where one person simultaneously holds the Chief Financial Officer and Chief Operations Officer position in a publicly traded company. This unified position generally does not have the strategy burden of a CEO, but CFO/COOs unify command over operational objectives and reporting objectives. Given that operations and reporting represent two of the three primary COSO internal control objectives, we argue that the relative effectiveness of unified CFO/COOs should be of particular importance to accountants. To explain, the unified CFO/COOs position empirically occurs when a CFO takes on the unified CFO/COO position (we find no occurrence of a COO becoming a CFO/COO), as such, outcomes associated with unified CFO/COOs speak to concerns about the operational business acumen of accountants (e.g., Kim, Hatcher, and Newton (2012) and Paulsson (2012)). Using a matched firm design, we find no evidence that CFO/COOs underperform their matched-firm peers; however, we do find two areas where CFO/COOs outperform their matched peers. First, the abnormal discretionary accruals of unified CFO/COO firms map into future cash flows better than do the accruals of matched firms. Second, unified CFO/COO firms appear to make wise discretionary expenditures given that abnormal positive discretionary expenditures are associated with both future cash flows and future ROA for unified CFO/COO firms, but not for matched firms with traditional CFOs.

Authors

• Austin Lansing Reitenga, University of Alabama-Tuscaloosa

• George Ruch, University of Oklahoma

• Steve Buchheit, University of Alabama