Corporate boards proactively discipline chief financial officers based on private signals of misreporting that never reach public view, according to new research that challenges assumptions about board oversight in an era of increased corporate governance scrutiny.

Researchers Summer Liu (assistant professor in the James Benjamin Department of Accounting at Texas A&M University’s Mays Business School) along with Phillip Lamoreaux (Arizona State University), Nathan Newton (Florida State University), and Min Zhang (Renmin University of China) analyzed proprietary audit adjustment data from China’s Ministry of Finance spanning 2010-2019, examining boards’ actions when auditors privately communicate necessary corrections to financial statements before public release.

The study found that CFOs face a 8.7% higher likelihood of dismissal when audit adjustments increase by one standard deviation. This association occurs only when auditors reduce reported income, suggesting boards tolerate conservative reporting but not aggressive overstatements that auditors must correct. In addition, boards with larger audit committees and those without CEOs as the chair showed stronger responses to audit adjustments, indicating governance quality affects disciplinary actions.

Furthermore, the study suggests boards act on private information without public pressure to protect their reputations — a key distinction from prior studies that focused on public signals like restatements or fraud allegations. The results also show boards use multiple disciplinary tools, as audit adjustments correlate with reduced CFO compensation beyond dismissals.

The findings demonstrate active corporate oversight even when stakeholders remain unaware of underlying reporting issues, providing new evidence that boards proactively demand reporting quality.

Read the full paper here

Summer Liu
Assistant Professor
James Benjamin Department of Accounting
sliu@mays.tamu.edu