Austin L. Reitenga

Earnings Restatements, the Sarbanes-Oxley Act and the Disciplining of Chief Financial Officers

We investigate involuntary chief financial officer (CFO) turnover following earnings restatements, the labor market penalties imposed on former restatement-firm CFOs, and whether these disciplinary consequences have increased following the passage of the Sarbanes-Oxley Act of 2002 (SOX). Our results suggest that, relative to a control group of non-restating firms, firms restating earnings have higher rates of involuntary CFO turnover, and that former restatement-firm CFOs face stiff labor market penalties. We generally find that the passage of SOX has not increased involuntary CFO turnover rates following restatements. However, we find that labor market penalties for former CFOs of restatement firms are more severe in the post-SOX period, suggesting that SOX has increased ex post settling up costs. Our results suggest that the influence of SOX on the labor market has resulted in CFOs being held more accountable for their actions.

Employee stock options and pro forma earnings management

Abstract Effective in 1996, FAS 123 established new financial reporting requirements for employee stock options. This study extends previous research that suggests that opposition to FAS 123 was politically motivated and that options have been used to manage earnings. We find strong evidence that reported option values under FAS 123 are influenced by various financial reporting costs of the firm, including political costs related to executive pay. The results appear to be consistent with previous research regarding the effects of political considerations and earnings management strategies on the use and disclosure of employee options.