Review of Recent Literature on Pressure on CFOs to Manipulate Financial Reports

Financial statement misreporting continues to be a significant problem for companies, shareholders, regulators, and internal and external auditors. According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO) sponsored study, Fraudulent Financial Reporting: 1998–2007 (Beasley, Carcello, Hermanson, and Neal, 2010), Chief Executive Officers (CEOs) and/or Chief Financial Officers (CFOs) are involved in the vast majority of the cases of financial reporting fraud in public companies. The involvement of CFOs is of particular concern given the CFO’s central role in financial reporting and his/her formal access to the financial records, which contributes to the CFO’s capability to commit fraud (Wolfe and Hermanson, 2004). CFOs face a variety of pressures that can cause them to manipulate financial results. Executives under such pressure must decide how to respond in a scenario from a number of alternatives that include alerting the audit committee, discussing the issue with the audit partner or head of internal audit, blowing the whistle to external authorities, or unfortunately, in some cases, succumbing to the pressure and manipulating the financial statements. This article reviews selected recent studies to provide insight into why some CFOs misreport financial results, including consideration of the specific pressures that can influence their decision-making. These studies suggest that a CFO may misreport financial results and participate in accounting fraud due to various internal and external pressures, including: 1) pressure from the CEO; 2) pressure to hit earnings benchmarks; 3) pressure to retain his/her job; 4) pressure to maintain the stock price; and 5) pressure to cover financial downturns. We also provide a number of questions for external and internal auditors to consider that may reveal undue pressure on the CFO