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Accolades for women CFOs

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Abhijit BaruaWomen CFOs are more reliable than men on estimates that are key to earnings quality.

Now that the USA 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.

Abhijit Barua is a Professor of Accounting in the School of Accounting at Florida International University. His research and consulting activities focus on financial reporting and corporate governance issues. His research has been published in The Accounting Review, Accounting Horizons and The Journal of Business Finance.

This commentary spotlights research done by Barua along with several FIU colleagues, indicating women CFOs are often more trustworthy than their male counterparts.


Research in 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 (CFOs). 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.

Large amounts of abnormal accruals may point to“cooked books“

"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 colleagues Lewis F. Davidson and Dasaratha V. Rama. "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."

Why so few female CFOs at public companies?

The findings lead the authors to wonder about the low percentage of female CFOs in the contemporary corporate world, a mere eight to nine per cent in the study's sample of 1448 firms. 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 Corporate Library database. 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).

“ Companies with female CFOs tend to have higher accruals quality, which, all else being equal, means higher earnings quality and more reliable accounting. “

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.

Women are more cautious in major financial decisions

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."

December 2010.