RESTATE AT YOUR PERIL
The personal cost of restatements.
By Alan Rappeport

Companies that restate their earnings have substantially higher rates of involuntary CFO turnover, a new study by four college professors shows. And since the Sarbanes-Oxley Act was passed in 2002, these departing finance chiefs also have faced a tougher time on the job market, say the professors, Denton Collins of the University of Memphis, Austin Reitenga of the University of Alabama, and the University of Arkansas’s Juan Manuel Sanchez and Adi Masli.

The authors surveyed 167 firms that restated earnings downward before Sarbox and 197 after it was enacted. They focused on CFOs who were fired within two years of the restatement and tracked their career progress for the next four years. The study also compared the restating companies with a control group of similar companies that did not restate.

The authors were surprised to find that Sarbox made little difference in the incidence of involuntary turnover. Both before and after the act was passed, a restatement increased the rate of involuntary turnover by four to five times. In the post-Sarbox period, 53 percent of CFOs who left their post after a restatement did so involuntarily. In the case of CFOs who left companies that later restated, only 13 percent of departures were involuntary, about the same rate found in the control group of companies that did not restate.

But Sarbox has had devastating consequences for the ability of a manager to find new work after being terminated by a company that restated. The authors tracked such CFOs for up to four years after they were terminated. The percentage of those who were able to find any job at all did not decline all that much: from 54 percent before Sarbox to 47 percent after. However, finding a comparable job—defined as CFO or better—became much more difficult: 37 percent were able to do that before Sarbox, but only 17 percent after.

“Firms are less willing in the post-Sarbox period to hire a former CFO with a tarnished reputation,” the authors write. “This appears to be consistent with the intent of the legislation to increase executive accountability.”