Are CFOs and Auditors Too Cozy? Good Question!

According to an article by Ben Haimowitz, a new academic study, the first post-SOX research of the "alumni effect" among North American auditors, is being published in the March issue of Accounting Horizons, a quarterly journal of the American Accounting Association (AAA). The research, "The Alumni Effect and Professional Skepticism: An Experimental Investigation,by Profs. Michael Favere-Marchesi and Craig E.N. Emby of Simon Fraser University, probed whether experienced audit managers' agreement with the client's CFO on an accounting judgment (goodwill valuation where evidence was mixed) would be swayed by whether the CFO was formerly a partner in a big 4 firm: 

  • The 1st control group was told that the CFO was a recent alumnus of the manager's firm and a former colleague with whom they worked on this and other clients.
  • The 2nd control group was told that the CFO was a former partner of another Big 4 firm.
  • The 3rd group received no information about the CFO's background.  
  • Managers in control groups 1 and 2 were told the CFOs were partners in their firms two (2) years ago.
  • Otherwise, the managers were provided the same information about the company and a set of financial statements.

All together, researchers posed questions via the Internet to 140 managers.  Results were as follows: 

  • Control Group 1 -  76% agreed with the CFO (former colleague / partner in same big 4 firm)
  • Control Group 2 - 48% agreed with the CFO (former partner of other Big 4) 
  • Control Group 3 - 39% agreed with the CFO (no background information on CFO) 

The researchers suggest that the findings merit regulatory review of the "cooling off" independence rules that dictate the amount of time a former auditor must wait to join an audit client in a financial reporting oversight role, which are: 

  • US - one (1) year
  • Canada - one (1) year
  • EU and UK - two (2) years

The article indicates that the Public Company Accounting Oversight Board (PCAOB) has considered the possibility of a longer cooling off period. (Note: this issue does not appear on the Board's standard setting or research agenda.) 

I would have liked to see an additional control group (same big 4 firm, but did not work on the same engagements), to remove that aspect of the equation.   

Definitely will be reading this one and may come back to this study at a later date....