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CFO Turnover following Adverse SOX 404 Opinions
Michael Ettredge, University of Kansas
Chan Li, University of Kansas
Lili Sun, Rutgers University
ABSTRACT. This study investigates turnover among chief financial officers (CFOs) following corporate implementation of Section 404 of the Sarbanes-Oxley Act (SOX) of 2002. We hypothesize and empirically find that companies receiving initial, adverse SOX 404 opinions experience a significantly higher rate of CFO turnover compared to control firms matched by size and industry. Firms with adverse SOX 404 opinions subsequently are more likely to hire new CFOs, and those CFOs typically have better professional qualifications than the CFOs they replace. We further examine the association between CFO turnover and subsequent improvement in internal control quality (i.e. improved SOX 404 opinion). Results indicate that simply hiring a new CFO does not result in internal control improvement. Instead, hiring a more capable CFO, or hiring a CFO from outside the firm, significantly increases the likelihood of improving upon prior adverse SOX 404 opinions.
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