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Women CFOs are more reliable than men in estimates that are key to earnings quality

Now that the Congressional testimony of that all-male lineup of Goldman-Sachs executives has threatened to give aggressive financial practice a bad name, a new study suggests a solution to at least one form of corporate sharp-dealing -- promote more women to the top ranks of company finance.

Research in the current issue of the American Accounting Association journal Accounting Horizons reveals that female chief financial officers have a decided edge on their male counterparts when it comes to a factor critical to the reliability of corporate financial statements. As the study puts it, firms with female CFOs have a "higher quality of accruals."

Accruals are accounting items that are recognized on balance sheets or income statements at the time they are earned or incurred, regardless of when cash is actually received or paid out. Accruals and cash flow are the yin and yang of corporate accounting, both being essential to obtaining a clear picture of company performance. But accruals are more subject than cash flow to uncertainty, so that estimating accruals can offer managers a considerable degree of accounting flexibility, whether they are current accruals, like accounts receivable and inventory, or longer-term items, like pension liabilities or property, plant, and equipment.

"A large amount of abnormal accruals in a company statement may suggest financial manipulation or fraud or it may simply suggest aggressive accounting," explains  Abhijit Barua of Florida International University, who carried out the study with FIU colleagues Lewis F. Davidson and Dasaratha V. Rama and Sheela Thiruvadi of Morgan State University. "What our study makes quite clear is that firms with women CFOs are associated with significantly lower amounts of abnormal accruals than those with male CFOs. In other words, companies with female CFOs tend to have higher accruals quality, which, all else being equal, means higher earnings quality and more reliable accounting."

The findings lead the authors to wonder about the low percentage of female CFOs in the contemporary corporate world, a mere eight to nine percent in the study's sample of 1448 firms in 2005 and 1,174 firms in 2004. As the authors put it, "The proportion of females entering the accounting profession has increased steadily in recent years, such that females constitute half of accounting graduates and those passing the CPA exam. Yet, we find that females constitute only a small proportion of CFOs of public companies. Taken together with our results... the data potentially have implications for executive recruiters and their hiring decisions."

The study’s sample consisted of firms listed in the 2006 edition of the Corporate Library database, with analysis focusing on data from 2004 and 2005.  Since there is no universally agreed-upon way of calculating abnormal accruals, the authors used four different formulas, or models, from the accounting literature, while controlling for a variety of factors likely to affect accruals, including companies' size, growth rate, return on assets, and cash flow. Whatever formula was employed, female CFOs were associated with lower abnormal accruals than male CFOs, with the likelihood that these results were due to chance ranging from about one in a thousand (one model) to about one in a hundred (two models) to about one in 20 (one model).

In other words, the differences between male and female CFOs ranged, depending on the accrual model employed, from statistically significant to highly significant.

The professors also found that whether a CEO was male or female had little or no effect on abnormal accruals and that firms' accrual quality improved when a woman succeeded a man as CFO, the improvement being statistically significant with three of the four accrual models employed in the study.

Prof. Barua acknowledges that the female CFOs' superior performance on accruals did not come as a great surprise. "A number of studies have shown women to be less aggressive or more cautious than men in a variety of financial decisions," he says. "In addition, female CFOs have been found to be more cautious in evaluating company acquisitions and in issuing debt. Such evidence led us to hypothesize that firms with female CFOs would have higher accrual quality than companies with male CFOs, and this clearly turns out to be the case."

The study, entitled "CFO Gender and Accruals Quality," is in the spring issue (March-May) of Accounting Horizons, published quarterly by the American Accounting Association, a worldwide organization devoted to excellence in accounting education, research, and practice. Other journals published by the AAA or its specialty sections include The Accounting Review, Issues in Accounting Education, AUDITING: A Journal of Practice and Theory, Behavioral Research in Accounting, The Journal of the American Taxation Association, and The Journal of Management Accounting Research



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