Companies that hire an executive with deep accounting experience as their chief financial officer (CFO) recognize the “tradeoffs” and will take steps to shore up their strategic and other non-accounting related skills in the C-suite, according to newly published research.
In fact, whether a CFO has accounting expertise is highly correlated to the industry they operate in as regulators force management's hand in picking the skills of their team.
“Given that the CFO role is multifaceted and has evolved to include many operational responsibilities, CFOs with greater accounting expertise are likely less effective in managing these non-accounting responsibilities,” according to the research paper. “We expect that firms recognize the tradeoffs in CFOs’ skill sets and hire CFOs based on the needs of the firm.”
The study, issued by researchers at the London School of Economics and the University of Washington, analyzed a sample of over 8,000 CFO hires at U.S. public firms between January 1, 2000 and December 31, 2013. The researchers identified CFO’s accounting expertise by choosing executives with a Certified Public Accountant (CPA) designation.
Overall, the study says that relative to non-CPA CFOs, CPA CFOs:
- are less likely to have a MBA;
- are less likely to have prior finance experience;
- have fewer years of their employment history working in a U.S. public company, and
- are less likely to sit on the board of a public company.
“These results reinforce the notion that CPA CFOs are valued for their accounting expertise and companies respond to demand for financial reporting expertise by hiring CPAs as CFOs,” the study states. “However, firms also appear to recognize the costs of hiring CPA CFOs; in situations where operational or general management skills are more important, firms prefer to appoint non-CPA CFOs. “
Separately, the study said that firms with a top manager holding an accounting related
job title are less likely to hire a CPA CFO and that firms with an existing Chief Operating Officer (COO) are more likely to hire a CPA CFO. “To the extent a COO position reduces the breadth of a CFO’s job responsibilities, hiring a CPA CFO is less costly for firms with existing COO positions,” the authors argue.
“Overall, our findings speak to the importance of accounting expertise on the top management team,” the authors argue. “The evidence suggests the likelihood of hiring a CPA CFO is highly sensitive to variation in the costs and benefits of accounting expertise. “