Waaaaaay back in 2005, I wrote here on Compliance Week about two very high-profile, ongoing criminal trials of corporate CEOs (WorldCom's Bernie Ebbers and HealthSouth's CEO Richard Scrushy). Both Ebbers and Scrushy argued in their defense that they were unaware of any accounting fraud at their companies, and that responsibility for the fraud lied with the person who controlled the company's books—the chief financial officer. The CFOs told a very different story at trial, however. These men admitted to participating in the frauds, but testified that they did so at the direction of their intimidating and unrelenting CEOs who ordered them to "hit the numbers"--no matter what it took.

I wrote that the cases against Ebbers and Scrushy raised an interesting question: why and how do CFOs often come to be the point-person for accounting fraud in public companies?

Is there some disproportionate lack of integrity among people who fill the CFO position? Are they simply prone to breaking rules? Logic and experience would dictate to the contrary. If anything, CFOs—typically risk-averse accountants and CPAs who have risen to the very top of their profession—would presumably gravitate to accounting careers due to a respect for rules and order.

Or is it as the CFOs in the WorldCom and HealthSouth cases have testified—that the intimidating, volatile people who were their bosses made it crystal clear through their words and conduct that the only financial report they would accept from these CFOs was one that “hit the numbers,” despite having already been told that such numbers could not be met legitimately?

This week, several accounting professors published an article that offers an answer to the question I raised in 2005. The paper entitled, "Why Do CFOs Become Involved in Material Accounting Manipulations?" concludes that "CFOs are likely to become involved in material accounting manipulations because they succumb to CEO pressure, rather than because they seek immediate financial benefit." It explains that

Our findings suggest that CFOs are typically not the instigator of accounting manipulations. Instead, it appears that CEOs, especially powerful CEOs with high equity incentives, exert significant influence over CFOs' financial reporting decisions. In other words, CFOs' role as watchdog over financial reports is compromised by the pressure from CEOs.

Accordingly, the professors argue, "[i]mproving CFO independence by alleviating the pressure of CEOs on CFOs could be critical to improving financial reporting quality." Download the full article here.