Financial Executive Qualifications Financial Executive Turnover and Adverse SOX

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Journal of Accounting and Economics 50 (2010) 93110
Contents lists available at ScienceDirect
Journal of Accounting and Economics

journal homepage: www.elsevier.com/locate/jae
Financial executive qualications, nancial executive turnover,

and adverse SOX 404 opinions$
Chan Li a, Lili Sun b, Michael Ettredge c,
a
University of Pittsburgh, USA
b
University of North Texas, USA
c
University of Kansas, USA
a r t i c l e in fo abstract
Article history: This study attempts to provide a comprehensive understanding of the interrelationships
Received 11 September 2007 among chief nancial ofcers (CFOs) professional qualications, SOX Section 404
Received in revised form internal control weakness, CFOs turnover, CFOs qualication improvement, and
31 December 2009
correction of material weaknesses. We nd that rms receiving initial adverse SOX
Accepted 14 January 2010
Available online 25 January 2010
404 opinions for 2004 have less qualied CFOs. Adverse SOX 404 opinion recipients
experience more CFO turnover in 2005, and these rms are more likely to hire CFOs
JEL classication: having improved qualications. Results show that simply hiring a new CFO is not
M40 associated with SOX 404 opinion improvement. Opinion improvement requires hiring a
M51
better qualied CFO.
& 2010 Elsevier B.V. All rights reserved.
Keywords:
CFO Turnover
Professional qualications
Internal control
SOX 404
1. Introduction
The Sarbanes-Oxley Act (SOX) was passed in 2002 in response to a wave of corporate accounting scandals. Some view it
as the most signicant nancial legislation of the past 70 years (PricewaterhouseCoopers, 2004). SOXs Section 404
requires public companies and their external auditors to report on the effectiveness of the companies internal control over
nancial reporting (ICOFR). Auditors are required to issue an adverse opinion on the ICOFR if one or more material
weaknesses exist (PCAOB Standard No. 2; Standard No. 5).1 SOX 404 is intended to increase investor condence in
companies nancial reports and in the underlying processes and controls integral to their production.
Companies with adverse SOX 404 opinions are associated with lower earnings quality (Ashbaugh-Skaife et al. 2008;
Chan et al. 2008), and larger management forecast errors (Feng et al. 2009). Improvement in SOX 404 opinions is associated
$
Data Availability: Data used in this study are available from public sources.
Corresponding author. Tel.: + 1 785 864 7537; fax: + 1 785 8645328.
E-mail address: mettredge@ku.edu (M. Ettredge).
1
Material weakness is the key concept in evaluating the effectiveness of ICOFR under SOX 404. The Public Company Accounting Oversight Board
(PCAOB) denes a material weakness as a signicant deciency, or a combination of signicant deciencies, that results in more than a remote likelihood
that a material misstatement of the annual or interim nancial statements will not be prevented or detected (PCAOB Auditing Standard No. 2, 2004).
When one or more material weaknesses exist in a companys ICOFR, SOX 404 requires auditors to indicate the weakness(es) in their reports. We refer to
these instances as adverse SOX 404 reports. On May 24, 2007, the PCAOB adopted Auditing Standard No. 5, which replaces the term more than remote
likelihood with reasonably possible when dening internal control material weakness. Auditing Standard No. 2 was in effect during our sample period.
0165-4101/$ - see front matter & 2010 Elsevier B.V. All rights reserved.
doi:10.1016/j.jacceco.2010.01.003
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94 C. Li et al. / Journal of Accounting and Economics 50 (2010) 93110
with improved earnings quality (Ashbaugh-Skaife et al. 2008), and reduced management forecast errors (Feng et al. 2009).
Thus, understanding the determinants of adverse SOX 404 opinions and subsequent corrective actions is important. Prior
literature (Ge and McVay, 2005; Doyle et al.2007; Ashbaugh-Skaife et al. 2007) investigates determinants of internal
control deciencies. Explanatory variables largely consist of companies nancial conditions (such as loss status and
leverage) and companies other characteristics (such as size, growth, and complexity). However, the actions companies
take to x control problems remain largely unexplored. We extend prior research by asking whether chief nancial ofcers
(CFOs) turnover and qualications are associated with adverse SOX 404 opinions and correction of internal control
material weaknesses.
CFOs supervise the recording and reporting functions in corporations. The nature of CFOs duties has been heavily
impacted by SOX, and the CFO turnover rate has increased over the past several years. Leone (2006), discussing a survey of
Fortune 500 companies CFOs, reports annual CFO turnover rates of 13 percent, 16 percent, and 19 percent respectively in
the post-SOX years of 20032005.2 For CFOs, the most signicant provision of SOX is Section 404, which emphasizes the
relationship between the nancial reports and the underlying processes and controls integral to producing those reports.
Both Congressional mandate and prevailing business practices hold CFOs accountable for these. According to Deloitte &
Touches Internet-based CFO Center (2008), accounting, control, risk management and asset preservation are the province
of the CFO. The CFO must ensure company compliance with nancial reporting and control requirements.
The quality of the CFOs performance should be a function of the CFOs expertise and incentives. A number of studies
have investigated the impact of management incentives on the quality of earnings (Healy, 1985; Cheng and Wareld,
2005; Bergstresser and Philippon, 2006). Little evidence is available on the effect of management expertise on the quality of
earnings, or on the underlying quality of ICOFR.3 In this paper, we focus on the role of the CFOs expertise (measured by
professional qualications) in the initial determination of adverse SOX 404 opinions and in the subsequent improvements
in ICOFR. We also examine the impact of adverse SOX 404 opinions on the CFOs turnover and on the new CFOs
qualications.
Given CFOs key role in ensuring internal control quality, we anticipate rms with less-qualied CFOs are more likely to
receive adverse SOX 404 opinions. Since poorly performing managers are more likely to be replaced (Coughlan and
Schmidt, 1985; Gilson, 1989; Beneish, 1999; Engel et al., 2003; Desai et al. 2006), companies receiving initial adverse SOX
404 opinions should experience higher CFO turnover.4 New CFOs are likely to have better qualications (more experience
or better accounting credentials) if companies receiving adverse SOX 404 opinions seek to upgrade the quality of their
ICOFR. We expect hiring new, better qualied CFOs improves subsequent SOX 404 opinions.
To investigate these hypotheses, we sample companies that disclose auditors initial SOX 404 assessments in Form
10-Ks led in 2005. The sample consists of 2478 companies: 416 receiving adverse SOX 404 opinions and 2062 receiving
clean SOX 404 opinions. Our empirical results are summarized as follows. First, companies receiving initial adverse SOX
404 opinions have CFOs with weaker qualications (in terms of accounting knowledge and experience as CFOs). Second,
adverse opinion companies experience more subsequent CFO turnover. Third, among companies experiencing CFO
turnover, those with adverse SOX 404 opinions hire more qualied new CFOs. This holds whether qualications of new
CFOs are compared to those of their predecessors, or to new CFOs at companies with clean SOX 404 opinions. Finally,
adverse SOX 404 opinion companies that simply hire new CFOs do not improve their internal control quality. Instead, only
those hiring more qualied CFOs receive better SOX 404 opinions in the following year. This nding suggests a positive
inuence of the newly hired CFOs professional qualications on internal control quality improvement. This is an important
practical implication for companies desiring to correct SOX 404 material weaknesses.
It is important to note that the association between CFO qualications and internal control quality could be determined
endogeneously. Some unobservable rm characteristics could drive both constructs. For instance, rms with inadequate
resources are more likely to employ less qualied CFOs, and are also more likely to have poor internal controls. Although
we control for rm size and nancial performance, those factors are unlikely to be exhaustive measures of rm resources.
However, in addition to showing that rms with poor initial CFO qualications are more likely to receive adverse SOX 404
opinions, the study also nds that rms receiving adverse opinions tend to experience CFO turnover, and rms hiring
improved CFOs are better at xing their control problems. These subsequent results suggest that the association between
CFO qualications and internal control quality is unlikely to be driven solely by omitted variables.
This studys contributions are three-fold. First, it contributes to the nascent SOX 404 literature. Prior studies of
determinants and improvements of adverse SOX 404 opinions mainly focus on companies nancial characteristics. This
study nds that CFOs qualications are important, providing practical guidance for companies seeking to improve their
2
Tuna (2008, p. B5) asserts that CFOs are quitting or being ousted because the demands of the job are growing. CFO turnover at large companies
remained at high levels in 2006 (14.1%) and 2007 (19.5%) according to Tuna.
3
The distinction between quality of ICOFR and quality of reported earnings numbers is important. A companys ICOFR inuences the expected quality
of all numbers contained in nancial reports, not just earnings. Furthermore, low earnings quality can refer to characteristics, such as low persistence or
high discretionary accruals, that do not necessarily constitute misstatements that ICOFR is intended to prevent.
4
CFO turnover following adverse SOX 404 opinions is unlikely to be simply punitive in nature since adverse SOX 404 opinions do not imply that
companies have committed any reporting errors, only that the companies internal controls are inadequate to make future reporting problems highly
unlikely. Instead, SOX 404-related CFO turnover might be a more complex phenomenon in which CFO turnover can be either voluntary or involuntary.
We discuss this issue when stating our second hypothesis in Section 3.
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C. Li et al. / Journal of Accounting and Economics 50 (2010) 93110 95
controls. Second, it contributes to the management turnover literature. Prior literature focuses on companies nancial
performance as the cause of management departure and as the benchmark of subsequent managerial performance.
This study examines management turnover in a new, non-nancial, yet important, context: internal control quality. It
provides initial evidence of the impact of CFOs qualications on subsequent change in quality of internal control systems.
Third, compared to most prior literature on management turnover, this study is more comprehensive. We examine not
only the effect of adverse SOX 404 opinions on turnover, but also the effect of CFOs qualications on control quality, and
the effect of turnover and CFOs improved qualications on control quality improvements.
To our knowledge, no prior management turnover study has comprehensively studied the interrelationships among
turnover, managerial performance, management qualications, change in management qualications, and change in
managerial performance after turnover. While we study the interrelationships among these multiple factors in the context
of a specic adverse managerial outcome, poor control quality, the implications have broad applicability to other situations
of poor managerial performance.
The remainder of the study is organized as follows. Section 2 reviews relevant past literature on management turnover.
Section 3 species our hypotheses. Section 4 discusses the data, and identies our regression models. Empirical results are
discussed in Section 5. Section 6 provides additional analyses. A nal section concludes the paper.
2. Prior literature on management turnover
Prior academic work examining Chief Financial Ofcers (CFOs) turnover is scarce. This section discusses studies of
management and director turnover in general, including turnover of CEOs, presidents, CFOs, board chairs, and board
members.
2.1. Company performance, nancial reporting failure, and management turnover
Poor company performance signicantly increases the likelihood of management turnover (Coughlan and Schmidt,
1985; Gilson, 1989). Mian (2001) concludes that CFO turnovers are disciplinary, being preceded by a decline in operating
return on assets. Other types of unsatisfactory company performance studied in relation to management turnover are
nancial distress and bankruptcy lings (Beneish, 1999; Gilson and Vetsuypens, 1993; Gilson, 1989). Brickley (2003)
concludes that the executive turnover literature has probably reached a point of diminishing returns in focusing on the role
of rm performance in explaining turnover. He calls for research that considers other, less-explored issues. Analyzing
age-related turnover is one example (Murphy and Zimmerman, 1993). This study extends the executive turnover literature
by providing empirical evidence on qualications-related turnover.
Empirical evidence on nancial reporting failure as a determinant of managerial turnover has been mixed. Earlier work
(Beneish, 1999; Agrawal et al.1999) documents no increase in management turnover following violations of generally
accepted accounting procedures or revelations of corporate fraud. However, more recent studies examining restatements
nd restating companies experience higher top manager (board chair, CEO, and/or president) turnover and director
turnover, compared to matched, non-restatement companies (Srinivasan, 2005; Desai et al., 2006).5 The signicant
associations between nancial reporting failure and management turnover observed in recent work could be a reection of
the more serious consequences of nancial reporting failures in recent years. In summary, involuntary management
turnover is often associated with poor company performance, both on the operational performance dimension and on the
nancial reporting dimension.
2.2. Management turnover, management qualications, and subsequent performance outcomes
Several studies focus on the effect of management turnover on companies subsequent nancial reporting. For example,
newly hired CEOs tend to reduce reported income in their initial year of employment to make future performance look
stronger (DeAngelo, 1988; Deloitte and Touche LLP, 2008; Murphy and Zimmerman, 1993). Newly hired CFOs have similar
incentives to reduce reported income in the rst year or two of their tenures, as evidenced by a signicant decrease in
companies discretionary accruals following the appointment of a new CFO (Geiger and North, 2006).
Direct evidence on the effect of a newly hired managers qualications on the companys subsequent performance is
limited. Huson et al. (2004) nd that CEOs hired from outside, rather than promoted from within, are associated with
greater improvements in reported nancial performance. Geiger and North (2006) note that CFOs newly hired from outside
generate greater decreases in discretionary accruals. However, no research explicitly examines the inuence of the new
hires professional expertise on the companies subsequent performance.
In the following section, we employ the above literatures to derive hypotheses for our specic context, that of CFO
turnover following company receipt of adverse SOX 404 opinions.
5
The subsequent employment prospects of displaced managers in restating companies are poorer than those of the control companies managers
(Desai et al., 2006).
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3. Hypotheses
Our rst hypothesis examines the association between companies initial SOX 404 opinions and the qualications
of the CFOs who are responsible for the companies internal control over nancial reporting (ICOFR). Although the CEO
bears the ultimate responsibility for all aspects of a companys performance, immediate responsibility for the ICOFR
typically lies with the CFO. Aier et al. (2005) nd CFOs nancial literacy is negatively associated with accounting errors
(using accounting restatements as a proxy). Companies are less likely to restate their earnings if their CFOs have more
years of work experience as CFOs, have M.B.A. degrees, and/or have CPA credentials. Therefore, a better (less) qualied CFO
is less (more) likely to be associated with a companys receipt of an initial adverse SOX 404 report. Our rst hypothesis is:
H1. A CFOs qualications are negatively associated with a companys receipt of an adverse SOX 404 opinion.
The above hypothesis applies to the CFO as of the end of scal year 2004. If a company experiences CFO turnover
subsequent to the end of scal 2004, the hypothesis refers to the predecessor CFO.6
Our second hypothesis examines the association between the receipt of adverse SOX 404 opinions and subsequent CFO
turnover. An adverse SOX 404 opinion on ICOFR means that it is reasonably possible that a material misstatement will not
be prevented or detected. We expect the receipt of such an adverse opinion is associated with an increasing likelihood of
voluntary or involuntary CFO turnover. Some CFOs, on their own initiative, are likely to seek employment at companies not
subject to SOX 404 requirements. For example, CFOs might view the resources their companies are willing to devote to
internal controls as inadequate. Or, they may feel that the pressure and workload imposed on them to improve the 404
opinions next year are too great. Such CFOs will voluntarily depart from their employers. In addition, CEOs and directors
are likely to be dissatised with CFOs whose nancial reporting systems receive unfavorable SOX 404 opinions, resulting in
dismissals of incumbent CFOs. Our second hypothesis is:
H2. A CFOs turnover is positively associated with a companys prior receipt of an adverse SOX 404 opinion.
Our third hypothesis examines the qualications of the replacement CFOs hired by adverse opinion companies,
compared to their predecessors qualications. Managerial performance following management turnover is better if the
newly hired manager is more qualied, as proxied by outside hires (Huson et al., 2004; Geiger and North, 2006). CEOs and
directors of adverse opinion companies likely desire to obtain the services of new and better qualied CFOs, expecting that
better qualied CFOs can contribute to a quicker improvement in ICOFR. Companies experiencing CFO turnover despite
favorable SOX 404 opinions have no corresponding motive to improve their CFOs qualications. Our third hypothesis is:
H3. Among companies that experience CFO turnover, improvement in the newly hired CFOs qualications (compared to
the CFOs they replace) is positively associated with a companys prior receipt of an adverse SOX 404 opinion.
Hypotheses H1 and H2 are tested using the full available sample of test and control companies. Hypothesis H3 is tested
using the subset of companies that experienced CFO turnovers in 2005.
Our next hypotheses investigate the impact of hiring a new CFO on improvement in subsequent SOX 404 opinions. Prior
evidence (Geiger and North, 2006) indicates a decrease in discretionary accruals under newly hired CFOs. From a different
perspective, hypothesis H4 tests whether adverse opinion companies changing CFOs receive better subsequent SOX 404
opinions irrespective of the new CFOs qualications. Geiger and North (2006) also nd reductions in discretionary accruals
are driven by new CFOs hired from the outside. They attribute this result to the likelihood that external hires will have
different nancial reporting perspectives than internal hires. We provide additional, explicit measures of qualitative
differences between new and former CFOs such as a CPA license or more years of CFO experience. Hypothesis H5 tests
whether improvement in SOX 404 opinions is associated with the better qualications of the new CFOs. These hypotheses
are:
H4. Among companies that receive adverse SOX 404 opinions, hiring new CFOs is positively associated with subsequent
receipt of improved SOX 404 opinions.
H5. Among companies that receive adverse SOX 404 opinions, hiring new CFOs that are more qualied (than the CFOs they
replace) is positively associated with subsequent receipt of improved SOX 404 opinions.
Hypotheses H4 and H5 are tested using only the sub-sample of companies that received initial adverse SOX 404
opinions. In the next section, we introduce the samples, models, and variables employed to test H1 through H5.
6
Suppose for example that a calendar year company les its initial SOX 404 report in Form 10-K in February of 2005, and changes CFOs in March of
2005. The predecessor (2004) CFO is deemed responsible for the SOX 404 report, and it is that CFOs qualications that are measured for the test of H1.
About 15 percent of the sample have CFO turnover in 2004. We treat those new CFOs as responsible for the content of the initial SOX 404 report received
in 2005. We include a dichotomous variable representing 2004 CFO turnover in the model testing H1.
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4. Samples, models, and variables
4.1. Samples
The data originates primarily from the Audit Analytics database. Audit Analytics obtains auditors SOX 404 opinions
from Form 10-K lings. Accelerated lers (public oat of $75 million or more), with nancial year-end dates on or after
November 15, 2004, are required to le SOX 404 reports. The sample begins with 2937 companies ling initial SOX 404
reports between January 2005 and May 2005. A large majority of accelerated companies led their initial SOX 404 reports
in this time frame. Information about CFOs qualications is collected from companies Form 10-K lings, proxy statements,
and google.com. Of the beginning sample 2478 have sufcient data to enable testing of H1. Of these, 416 received adverse
SOX 404 opinions in 2005 (covering scal 2004). The other 2062 companies received initial clean SOX 404 opinions. Of the
2478 companies employed to test H1, 120 lack governance data. Thus 2358 companies are available to test H2.
To identify CFO turnover in 2005 among the sample companies, we employ Lexis-Nexis searches of Form 8-Ks led in
2005, and of proxy statements led in early 2006. These procedures identify 355 companies having CFO turnover in 2005.
For 13 of these companies, information on the new CFOs is unavailable. Thus, the sample for testing H3 consists of 342
companies experiencing CFO turnovers in 2005. Finally, of the 416 companies receiving adverse SOX 404 opinions in 2005
(covering 2004), lack of required data in 2005 reduces the sample to 383 for testing H4 and H5. Table 1 provides more
information about the disposition of the sample.
4.2. Models and variables
4.2.1. Model for H1

H1 posits a negative association between the CFOs qualications in 2004 and the receipt of initial adverse SOX 404
opinions early in 2005. We use two variables to proxy for the CFOs qualications: CFOACCT04 and CFOEXP04. The logistic
regression model for testing H1 is
ADVERSE a b1 CFOACCT04 b2 CFOEXP04 b3 LnASSET
b4 LEVERAGE b5 INDADJROA b6 GROWTH
b7 INDADJRETURN b8 BIG4 b9 RESTATE
b10 RECEIVABLE b11 INVENTORY b12 SEGMENT
b13 RESTRUCT b14 CEOTURN04 b15 CFOTURN04
b16 SOX302DIS; 1
where
ADVERSE 1 if company receives an adverse initial SOX 404 opinion for 2004, 0 otherwise.
CFOACCT04 1 if companys CFO in 2004 has a CPA license or has worked in a public accounting rm, 0 otherwise.
CFOEXP04 natural logarithm of the number of years the CFO has held a CFO position, as of 2004.
LnASSET natural logarithm of total assets at the end of scal year 2004.
LEVERAGE total debt divided by total assets at the end of scal year 2004.
INDADJROA industry-adjusted return on assets for the scal year 2004.
GROWTH sales growth from 2003 to 2004, i.e., (sales04sales03)/sales03.
INDADJRETURN industry-adjusted buy and hold return for scal year 2004.
BIG4 1 if companys auditor is one of the Big 4 in 2004, 0 otherwise.
RESTATE 1 if company restates its nancial statements in 2004, 0 otherwise.
RECEIVABLE accounts receivable/total assets at the end of scal year 2004.
Table 1
Sample attrition.
Firms that led SOX 404 reports from January 2005 to May 2005 2,937
Less: Firms without necessary data from Compustat and CRSP (108)
Less: Firms without CFO information (351)
Sample for testing H1 (see Table 3) 2,478
Less: Firms without necessary governance data (120)
Sample for testing H2 (see Table 4) 2,358
Less: Firms without CFO turnovers in 2005 (2003)
Firms with CFO turnovers in 2005 355
Less: Firms without information about new CFOs (13)
Sample for testing H3 (see Tables 5 and 7) 342
Firms receiving adverse initial SOX 404 opinions in 2005 416
Less: Firms without necessary data from Compustat and CRSP for 2005 (24)
Less: Firms without SOX 404 opinions in 2006 (9)
Sample for testing H4 and H5 (see Tables 6 and 8) 383
The base sample of 2,937 companies was obtained from the Audit Analytics database. SOX 404 reports refer to companies reports of external auditors
opinions on companies internal control over nancial reporting rendered under Section 404 of the Sarbanes-Oxley Act of 2002.
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INVENTORY inventory/total assets at the end of scal year 2004.

SEGMENT natural logarithm of the number of companys reportable segments for scal year 2004.
RESTRUCT 1 if company undergoes restructuring in 2004, 0 otherwise.
CEOTURN04 1 if company hires a new CEO in 2004, 0 otherwise.
CFOTURN04 1 if company hires a new CFO in 2004, 0 otherwise.
SOX302DIS 1 if company discloses a material weakness in its SOX Section 302 disclosure in 2004, 0 otherwise.
We expect negative signs for the coefcients of our test variables CFOACCT04 and CFOEXP04. Control variables are
drawn from prior literature on determinants of internal control quality (Ge and McVay, 2005; Ashbaugh-Skaife et al., 2007;
Doyle et al., 2007). Companies are more likely to receive adverse SOX 404 opinions if they are nancially weaker (proxied
by lower industry-adjusted return on assets, lower industry-adjusted stock returns, smaller size, and higher leverage),
more complex (proxied by number of reportable segments, receivable ratio, and inventory ratio), growing rapidly,
undergoing restructuring, disclosing internal control problems in the 2004 SOX Section 302 disclosures, or restating their
nancial statements. We do not specify an expected sign for the BIG4 variable. Big 4 clients might tend to have stronger
internal controls. On the other hand, Big 4 auditors could be more willing to render unfavorable SOX 404 assessments.
We also control for CEO and CFO turnovers in 2004 (CEOTURN04 and CFOTURN04). We do not specify the signs for these
variables. A company expecting to receive an adverse SOX 404 opinion might change its CFO. However, hiring a new CFO in
2004 could reduce the likelihood of an adverse opinion, especially if the new CFO is able to improve controls, and if the
hiring is correlated with greater investment in other aspects of internal controls.
4.2.2. Models for H2 and H3

Hypothesis H2 species a positive association between receipt of adverse initial SOX 404 opinions and subsequent CFO
turnover. The logistic regression model for testing H2 is as follows:
CFOTURN05 a b1 ADVERSE b2 LnASSET b3 LEVERAGE
b4 INDADJROA b5 GROWTH
b6 INDADJRETURN b7 RESTATE b8 CEOCHAIR
b9 INDEPDIR b10 INSTIOWN b11 CEOTURN05
b12 CEOTURN04 b13 CFOTURN04
b14 SOX302DIS b15 CFOACCT04 b16 CFOEXP04 2
The following variables are employed in model (2) but not in model (1):
CFOTURN05 1 if company hires a new CFO in 2005, 0 otherwise.
CEOCHAIR 1 if CEO is also the chair of the board in 2005, 0 otherwise.
INDEPDIR percentage of independent directors in 2005.
INSTIOWN percentage of institutional stock ownership in 2005.
CEOTURN05 1 if company hires a new CEO in 2005, 0 otherwise.
Our test variable, ADVERSE, is expected to have a positive coefcient under H2. Control variables are based upon recent
management turnover literature (Srinivasan, 2005; Desai et al., 2006). Most of these variables previously were specied
with respect to model (1). Since poor performance tends to trigger management turnover, companies with lower return on
assets, lower stock returns, and restatements, are more likely to experience CFO turnover.
We do not offer a prediction for the signs of the following corporate governance variables: CEO duality, board
independence, and institutional ownership. Poorly governed companies arguably are less likely to remove inadequate
executives. However, capturing quality of governance is complex, and some aspects of governance are endogenously
determined. For example, CEO duality often is viewed as indicating weaker governance. However, a CEO might serve as
chair due to superior ability (Dey et al., 2009).7 Thus CEO duality per se is not a reliable indicator of weak governance.
Companies with a prior year CFO change and those having more qualied initial CFOs are expected to have lower
likelihood of CFO turnover. Prior year or current year CEO changes are expected to be positively associated with CFO
turnover (Mian, 2001; Geiger and North, 2006). Material weakness disclosed in SOX 302 reports prior to SOX 404 opinions
should be associated with CFO turnover. We do not specify expected signs for company size, leverage, or growth.
To test H3 on the positive association between the receipt of adverse SOX 404 opinions and improved qualications of
newly hired CFOs, we restrict our analysis to rms with CFO turnovers in 2005. The logistic regression model for testing H3
is as follows:
CFO Qualification Improvement a b1 ADVERSE b2 LnASSET
b3 LEVERAGE b4 INDADJROA
b5 GROWTH b6 INDADJRETURN
b7 RESTATE b8 CEOCHAIR
b9 INDEPDIR b10 INSTIOWN
7
For example Steven Jobs holds both positions at Pixar Animation Studios, and has done so at various other companies over time.
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b11 SOX302DIS b12 CFOACCT04

b13 CFOEXP04 3
The dependent variables representing new CFO qualication improvement are:
ACCTIMPROVE 1 if a new CFO is hired and has more accounting knowledge (i.e., has a CPA license or has public accounting rm working experience)
than the CFO replaced, 0 otherwise.
EXPIMPROVE 1 if a new CFO is hired and has more CFO working experience than the CFO replaced, 0 otherwise.
CFOIMPROVE 1 if a new CFO is hired and has both more accounting knowledge and more CFO working experience than the CFO replaced, 0
otherwise.
Under H3, we expect the coefcient of ADVERSE to be positive and signicant. Companies having more qualied
predecessor CFOs (CFOACCT04 and CFOEXP04) are less likely to be able to hire improved CFOs, leading to negative
expected coefcients for these variables. We expect highly leveraged companies, those restating nancial reports, and
those disclosing adverse self-assessments under SOX 302 to seek improved CFOs. We do not specify the signs for other
variables.8
4.2.3. Models for H4 and H5

To test H4 and H5, we employ the sub-sample of companies that received adverse SOX 404 opinions in 2005 (covering
2004). H4 tests for a positive association between CFO turnover in 2005 and SOX 404 opinion improvement in 2006
(covering 2005). The model is
OPINIMPROVE a b1 CFOTURN05 b2 LnASSET b3 LEVERAGE

b4 INDADJROA b5 GROWTH b6 INDADJRETURN
b7 BIG4 b8 RESTATE b9 RECEIVABLE
b10 INVENTORY b11 SEGMENT
b12 RESTRUCT b13 GENERAL b14 CFOTURN04 4
The new variables in this model include:
OPINIMPROVE 1 if companys second year SOX 404 opinion improves from adverse to clean, 0 otherwise.
GENERAL 1 if company has a SOX 404 general material weakness in the rst year, 0 otherwise.
Under H4, we expect the CFO turnover variable, CFOTURN05, to have a positive coefcient. Since company-level
problems (GENERAL) should take more time to x, we control for the type of the prior years material weakness.9
We expect a negative association between OPINIMPROVE and GENERAL.
For control variables, we expect companies to be better able to improve their subsequent SOX 404 opinions if they are
larger (LnASSET), nancially stronger (smaller LEVERAGE, greater INDADJROA and INDADJRETURN), less complex
(RECEIVABLE, INVENTORY, SEGMENT, RESTRUCT), growing less rapidly (GROWTH), and with fewer nancial reporting
problems to overcome (no RESTATE-ments, without GENERAL weaknesses). We do not specify an expected sign for the
BIG4 and CFOTURN04 variables. All control variables are measured as of the end of year 2005 unless otherwise dened.
Hypothesis H5 examines whether improved CFO qualications, rather than just CFO turnover, facilitates subsequent
SOX 404 opinion improvement. To test H5, the SOX 404 opinion improvement variable, OPINIMPROVE, is regressed against
CFOTURN05, and three CFO qualications improvement variables. In the model, we also control for levels of new CFO
qualications. Conceptually, both the levels of the CFOs qualications, and the changes in CFOs qualications given
turnover, could affect prospects of opinion improvement.10 The logistic regression model is
OPINIMPROVE a b1 CFOTURN05 b2 ACCTIMPROVE b3 EXPIMPROVE

b4 CFOOUTSIDE b5 CFOACCT05 b6 CFOEXP05
b7 LnASSET b8 LEVERAGEb9 INDADJROA
b10 GROWTH b11 INDADJRETURN b12 BIG4
b13 RESTATE b14 RECEIVABLE b15 INVENTORY
b16 SEGMENT b17 RESTRUCT b18 GENERAL b19 CFOTURN04 5
8
Given that model (3) is estimated using the sub-sample of companies that hired new CFOs in 2005, we omit these variables employed in model (2):
CEOTURN05, CEOTURN04, and CFOTURN04, because they are intended to control for other factors affecting CFO turnover likelihood. When we include
these three variables in model (3), none of them is signicant, and our results remain unchanged.
9
General material weakness refers to control weakness at the company-level which might have a pervasive effect on the achievement of many
overall objectives of the control criteria (PCAOB Standard No. 2, para. 52, p. 163). Control weakness at the account or transaction-level is referred to as
specic material weakness.
10
For example, a rm that hires a CFO who is more qualied than his predecessor, but who still is less qualied than CFOs at other rms, does not
necessarily have a substantial chance of improving its internal control quality.
ARTICLE IN PRESS
Fiscal Yr. 04 Fiscal Yr. 05 Fiscal Yr. 06
Time
Initial SOX 404 CFO turnover 2nd Yr. SOX 404

opinion received does / does not opinion received
(for 2004) occur in 2005 (for 2005)
Variables of primary interest
Dependent ADVERSE (H1) CFOTURN05 (H2) OPINIMPROVE (H4, H5)

variables ACCTIMPPROVE (H3)
EXPIMPROVE (H3)
CFOIMPROVE (H3)
Explanatory CFOACCT04 (H1) ADVERSE (H2, H3) CFOTURN05 (H4, H5)

test variables CFOEXP04 (H1) ACCTIMPROVE (H5)
EXPIMPROVE (H5)
CFOOUTSIDE (H5)
Fig. 1. Timeline in relation to variables of primary interest.
All variables have been previously dened with the exception of
CFOOUTSIDE 1 if a new CFO is hired from outside the company, 0 otherwise.
We include CFOOUTSIDE, representing external versus internal new CFO hires, and expect a positive coefcient sign.
Prior research indicates hiring of external managers is associated with greater improvements in nancial performance and
earnings quality (Huson et al., 2004; Geiger and North, 2006).
Given that variables ACCTIMPROVE, EXPIMPROVE, and CFOOUTSIDE capture the relevant dimensions of new CFO
improvement, the coefcient of variable CFOTURN05 represents the effect of CFO turnover without improvement
(i.e., those cases where ACCTIMPROVE=0, EXPIMPROVE= 0, and CFOOUTSIDE= 0). We expect a positive coefcient for each
of the three CFO qualications improvement variables. We expect CFO turnover without improvement (or with decreased
CFO qualications) to have a negative association with OPINIMPROVE. We expect the two CFO qualication level variables
(CFOACCT05, CFOEXP05) to have positive associations with OPINIMPROVE.
Fig. 1 provides a timeline for the study and summarizes the variables of primary interest in relation to major events
along the timeline. Our main empirical results are provided in the next section.
5. Primary results
5.1. Descriptive statistics
Table 2 provides descriptive statistics for study variables.11 Panel A of Table 2 compares 416 companies receiving initial
adverse SOX 404 opinions (received in 2005 and covering 2004) to 2062 companies with clean SOX 404 opinions.
The variables listed are employed in model (1) to test H1, with regression results presented in Table 3. The mean tests
indicate rms with initial adverse SOX 404 opinions have less qualied CFOs, as proxied by less accounting knowledge
(CFOACCT04) and less working experience as CFOs (CFOEXP04).12 This provides initial support to H1: CFO qualication is
negatively associated with the receipt of an adverse SOX 404 opinion.
Panel B of Table 2 compares means and medians of variables between 355 companies having CFO turnover following
receipt of initial SOX 404 opinions, and 2003 companies without CFO turnover. The variables listed are employed in model
(2) to test H2, with regression results presented in Table 4. Univariate analysis indicates that the proportion of companies
receiving adverse SOX 404 opinions, among companies that experience CFO turnovers, is 0.304 compared to 0.154 for
companies that experience no CFO turnover. The difference in means is signicant at p =0.001. This provides initial support
to H2: Receipt of an adverse SOX 404 opinion is positively associated with subsequent CFO turnover.
11
We winsorize all continuous variables at the 99th (1st) percentiles to eliminate outliers.
12
CFOEXP04 is dened as the natural logarithm of working experience as a CFO. The mean of the pre-logged number of years as CFO for our sample
companies is 8.5 years. Mean CFO tenure at current companies is 5.0 years (not tabulated).
ARTICLE IN PRESS
Table 2
Descriptive statistics.
Panel A: Companies with and without adverse initial SOX 404 opinions in 2005
ADVERSE (= 1, 0) ADVERSE (= 1, 0)
1= Adverse 0= Clean 1 =Adverse 0= Clean
Table 3 N= 416 N = 2062 N = 416 N =2062
Variables Mean Mean t-stat. Median Median Z-stat.a
CFOACCT04 0.317 0.482 6.18***

CFOEXP04 1.818 1.963 4.03*** 1.946 2.079 3.06***
LnASSET 20.356 20.898 5.55*** 20.097 20.790 4.94***
LEVERAGE 0.239 0.225 1.14 0.177 0.183 0.43
INDADJROA 0.030 0.016 5.47*** 0.002 0.009 5.37***
GROWTH 0.174 0.208 1.68* 0.090 0.129 3.22***
INDADJRETURN 0.019 0.082 3.35*** 0.002 0.027 2.79***
BIG4 0.829 0.904 4.44***
RESTATE 0.507 0.096 22.69***
RECEIVABLE 0.184 0.196 1.00 0.111 0.125 1.83*
INVENTORY 0.094 0.072 3.54*** 0.028 0.014 2.26**
SEGMENT 0.661 0.629 0.83 0.693 0.000 1.44
RESTRUCT 0.255 0.212 1.91**
CEOTURN04 0.039 0.072 2.52**
CFOTURN04 0.149 0.168 0.96
SOX302DIS 0.099 0.006 12.09***
Panel B: Companies with and without CFO turnover in 2005
CFOTURN05 (= 1, 0) CFOTURN05 (= 1, 0)
1 =New CFO 0 =No change 1= New CFO 0= No change
Table 4 N = 355 N = 2003 N =355 N = 2003
ADVERSE 0.304 0.154 6.92***

LnASSET 20.425 20.849 4.06*** 20.269 20.736 3.63***
LEVERAGE 0.214 0.227 1.08 0.177 0.181 0.52
INDADJROA 0.023 0.014 3.95*** 0.001 0.008 3.05***
GROWTH 0.226 0.200 1.22 0.139 0.120 1.90*
INDADJRETURN 0.056 0.074 0.90 0.009 0.031 1.45
RESTATE 0.225 0.155 3.31***
CEOCHAIR 0.513 0.517 0.16
INDEPDIR 0.748 0.716 4.11*** 0.750 0.727 3.06***
INSTIOWN 0.476 0.540 3.71*** 0.427 0.549 3.51***
CEOTURN05 0.124 0.078 2.87***
CEOTURN04 0.070 0.064 0.42
CFOTURN04 0.096 0.152 2.78***
SOX302DIS 0.048 0.018 3.60***
CFOACCT04 0.332 0.473 4.92***
CFOEXP04 1.714 1.976 6.83*** 1.946 2.079 3.22***
Panel C: Companies changing CFOs: new CFOs do/do not have clearly improved qualications
CFOIMPROVE (=1, 0) CFOIMPROVE (= 1, 0)

1= Improved CFO 0= No clear Improve 1= Improved CFO 0= No clear Improve
Table 5 N= 42 N= 300 N = 42 N =300
ADVERSE 0.595 0.277 4.26***

LnASSET 20.045 20.436 1.33 20.001 20.298 0.99
LEVERAGE 0.223 0.214 0.27 0.169 0.177 0.00
INDADJROA 0.055 -0.020 1.07 0.004 0.003 0.99
GROWTH 0.184 0.238 0.74 0.180 0.143 0.66
INDADJRETURN 0.007 0.061 0.81 0.050 0.006 0.34
RESTATE 0.286 0.217 1.00
CEOCHAIR 0.310 0.533 2.74***
INDEPDIR 0.756 0.745 0.48 0.750 0.750 0.48
INSTIOWN 0.385 0.480 1.95* 0.323 0.440 1.65*
SOX302DIS 0.024 0.053 0.82
CFOACCT04 0.000 0.387 5.13***
CFOEXP04 1.200 1.775 4.15*** 1.386 1.946 3.30***
ARTICLE IN PRESS
Panel D: Adverse opinion companies that do/do not receive improved subsequent SOX 404 opinions
OPINIMPROVE (= 1, 0) OPINIMPROVE ( =1, 0)

1= Opinion improve 0= No Improve 1= Opinion improve 0 =No Improve
Table 6 N =282 N =101 N= 282 N = 101
CFOTURN05 0.248 0.297 0.96

ACCTIMPROVE 0.149 0.069 2.06**
EXPIMPROVE 0.121 0.059 1.73*
CFOOUTSIDE 0.188 0.178 0.22
CFOACCT05 0.454 0.347 1.88*
CFOEXP05 1.779 1.551 2.35* 1.946 1.792 1.243
LnASSET 20.515 20.288 1.09 20.348 19.808 1.94*
LEVERAGE 0.241 0.234 0.22 0.183 0.177 0.09
INDADJROA 0.001 0.063 4.18*** 0.001 0.020 2.87***
GROWTH 0.191 0.091 2.39** 0.109 0.071 2.17**
INDADJRETURN 0.064 0.043 2.40** 0.001 0.067 1.94*
BIG4 0.848 0.822 0.61
RESTATE 0.514 0.475 0.67
RECEIVABLE 0.186 0.198 0.54 0.111 0.129 1.07
INVENTORY 0.101 0.076 1.62* 0.028 0.021 0.09
SEGMENT 1.237 1.452 2.37** 0.693 1.792 2.32**
RESTRUCT 0.255 0.396 2.69***
GENERAL 0.333 0.426 1.66*
***, **, *, designates signicant at the 0.01, 0.05, 0.10 levels, respectively (two-tailed).
a
Tests of differences in medians are not presented for dichotomous variables.
Variables
ADVERSE 1 if company receives an adverse initial SOX 404 opinion for 2004, 0 otherwise.
CFOACCTXX 1 if companys CFO in year XX has a CPA license or has worked in a public accounting rm, 0 otherwise. XX is 04 for 2004 and
is 05 for 2005.
CFOEXPXX Natural logarithm of the number of years the CFO has held a CFO position, as of year XX. XX is 04 for 2004 and is 05 for 2005.
LnASSET Natural logarithm of total assets at the end of scal year 2004 or 2005.
LEVERAGE Total debt divided by total assets at the end of scal year 2004 or 2005.
INDADJROA Industry-adjusted return on assets for the scal year 2004 or 2005.
GROWTH Sales growth from 2003 to 2004 or 2004 to 2005. For example: (sales04 sales03)/sales03.
INDADJRETURN Industry-adjusted buy and hold return for scal year 2004 or 2005.
BIG4 1 if companys auditor is a Big 4 auditor in 2004 or 2005, 0 otherwise.
RESTATE 1 if company restates nancial statements in 2004 or 2005, 0 otherwise.
RECEIVABLE Accounts receivable/total assets at the end of scal year 2004 or 2005.
INVENTORY Inventory/total assets at the end of scal year 2004 or 2005.
SEGMENT Natural logarithm of the number of companys reportable segments for scal year 2004 or 2005.
RESTRUCT 1 if the client restructured in 2004 or 2005, 0 otherwise.
CEOTURNXX 1 if a company hires a new CEO, 0 otherwise. XX is 04 for 2004 and is 05 for 2005.
CFOTURNXX 1 if a company hires a new CFO, 0 otherwise. XX is 04 for 2004 and is 05 for 2005.
SOX302DIS 1 if a company discloses internal control weakness in its SOX Section 302 disclosure in 2004, 0 otherwise.
CEOCHAIR 1 if the CEO is also the chair of the board in 2005, 0 otherwise.
INDEPDIR Percentage of independent directors in 2005.
INSTIOWN Percentage of institutional stock ownership in 2005.
CFOIMPROVE 1 if a new CFO is hired and has both more accounting knowledge and more CFO working experience than the CFO replaced, 0
otherwise.
ACCTIMPROVE 1 if a new CFO is hired and has more accounting knowledge (has a CPA license or has public accounting rm working experience)
than the CFO replaced, 0 otherwise.
EXPIMPROVE 1 if a new CFO is hired and has more CFO working experience than the CFO replaced, 0 otherwise.
OPINIMPROVE 1 if a companys second year SOX 404 opinion improves from adverse to clean, 0 otherwise.
GENERAL 1 if company has a SOX 404 general material weakness in the rst year, 0 otherwise.
CFOOUTSIDE 1 if a new CFO is hired from outside the company, 0 otherwise.
Panel C of Table 2 compares characteristics of 42 companies hiring clearly better qualied new CFOs (i.e., CFOs with both
better accounting credentials and more experience as a CFO) to 300 companies whose 2005 new CFOs are less clearly
improved. The variables listed are employed in model (3) to test H3, with regression results presented in Table 5. The
proportion of companies previously receiving adverse SOX 404 opinions (ADVERSE=1) in the clearly better qualied CFO group
is about twice as high as that in the other group (0.595 vs. 0.277), signicant at p=0.001. This provides evidence supporting H3:
Among rms experiencing CFO turnover, those receiving initial adverse opinions are more likely to hire better qualied CFOs.13
13
The data show that 23.1 percent (25/108) of companies receiving adverse opinions, and changing CFOs, hired demonstrably improved CFOs.
Among the clean companies changing CFOs, the percentage hiring clearly more qualied CFOs is 7.3 percent (17/234). These proportions differ
signicantly (t = 4.26, p = 0.001).
ARTICLE IN PRESS
Table 3
Logistic regression results explaining initial SOX 404 opinions.
Variables +/ Model (1) DepVar = ADVERSE (H1)
Coefcient Wald w2
Intercept 3.895 20.243***

CFOACCT04 0.777 34.534***
CFOEXP04 0.408 19.037***
LnASSET 0.246 30.779***
LEVERAGE + 0.548 3.443**
INDADJROA 0.931 5.886***
GROWTH + 0.251 2.246
INDADJRETURN 0.385 4.634**
BIG4 ? 0.416 4.709**
RESTATE + 2.219 255.026***
RECEIVABLE + 0.807 5.762***
INVENTORY + 1.250 6.322***
SEGMENT + 0.191 3.916**
RESTRUCT + 0.129 0.727
CEOTURN04 ? 0.570 3.611*
CFOTURN04 ? 0.395 4.633**
SOX302DIS + 1.573 19.235***
Total Obs. = 2478

Adverse opinion Obs. = 416
w2 = 508.219***
Pseudo R2 = 0.311
***, **, *, designates signicant at the 0.01, 0.05, 0.10 levels, respectively (one-tailed for signed expectations and two-tailed for unsigned expectations).
See Table 2 for variable denitions.
Panel D of Table 2 compares characteristics of companies that do (N=282) versus companies that do not (N= 101)
experience subsequent improvement of SOX 404 opinions. The variables listed are employed in model (4) and model (5) to
test H4 and H5, with regression results presented in Table 6. For the SOX 404 improvement group, the 2005 CFO turnover
rate of 0.248 does not differ from 0.297 for the non-improvement group. This evidence does not support H4. However,
companies showing SOX 404 opinion improvement are more likely to hire CFOs with improved qualications. CFO
accounting credentials improved for 14.9 percent of the improved opinion group, versus 6.9 percent of the group that did
not improve their opinions. CFO experience improved for 12.1 percent of the opinion improvement group, versus 5.9
percent of the other group. These differences are signicant, offering initial support to H5: Hiring better qualied new CFOs
(compared to predecessors) is associated with subsequent improvement in SOX 404 opinions.
5.2. Determinants of adverse SOX 404 opinions (H1)
Table 3 reports logistic regression results for the test of hypothesis H1. The analysis is conducted using the full sample
of 2478 companies, including 416 adverse opinion companies and 2062 clean opinion companies. In model (1), CFOACCT04
and CFOEXP04 each are negatively associated with ADVERSE, which provides evidence that companies having better
qualied CFOs are less likely to receive initial adverse SOX 404 opinions. Thus, H1 is supported. As for control variables,
consistent with prior studies (Doyle et al., 2007; Ashbaugh-Skaife et al., 2007; Ettredge et al., 2007), companies that are
larger, more protable, with higher stock returns, and audited by the Big 4 are less likely to receive adverse opinions.
Companies having greater leverage, restating nancial statements, holding more receivables and inventory, reporting more
segments, or disclosing material weaknesses in the prior SOX 302 disclosures are more likely to receive adverse SOX 404
opinions. In addition, companies that underwent CEO or CFO turnover in 2004 are less likely to receive adverse opinions.14
The results in Table 3 suggest that CFO qualications are incrementally important determinants of a rms internal control
quality beyond previously identied factors.
5.3. Determinants of CFO turnover and change in CFO qualications (H2 and H3)
Table 4 reports logistic regression results for the test of hypothesis H2. The analysis uses the full sample of 2358
companies for which required data is available. In model (2), with CFOTURN05 as the dependent variable, ADVERSE has a
positive coefcient of 0.562, statistically signicant at p = 0.001. Adverse opinion companies are more likely to experience
14
Companies hiring new CFOs in 2004 likely did so in part to improve their chances of receiving clean SOX 404 opinions. We speculate that such
hiring of new CFOs is accompanied by investment of other resources to improve internal controls. When we delete 409 companies whose CFOs were hired
in 2004, the results of estimating model (1) are essentially the same as shown in Table 3.
ARTICLE IN PRESS
Table 4
Logistic regression results explaining CFO turnover.
Variables +/ Model (2) DepVar = CFOTURN05 (H2)
Coefcient Wald w2
Intercept 0.696 0.654

ADVERSE + 0.562 11.309***
LnASSET ? 0.115 8.786***
LEVERAGE ? 0.066 0.050
INDADJROA 0.819 5.005**
GROWTH ? 0.165 1.219
INDADJRETURN 0.049 0.082
RESTATE + 0.036 0.041
CEOCHAIR ? 0.157 1.584
INDEPDIR ? 1.538 10.277***
INSTIOWN ? 0.053 0.056
CEOTURN05 + 0.697 12.983***
CEOTURN04 + 0.229 0.918
CFOTURN04 1.003 23.928***
SOX302DIS + 0.687 4.020**
CFOACCT04 0.537 17.405***
CFOEXP04 0.641 48.647***
Total Obs. = 2358

CFO turnover Obs. = 355
w2 = 175.949***
Pseudo R2 = 0.126
CFO turnover than clean opinion companies, which supports hypothesis H2. As for control variables, companies having
more independent directors, those experiencing CEO turnover in 2005, and those reporting material weakness in their
2004 SOX 302 disclosures are more likely to hire new CFOs. Larger companies, more protable companies, those
experiencing prior year CFO changes, and those having better qualied initial CFOs, are less likely to hire new CFOs.15
Results for several control variables deserve additional attention. We think it is a new nding in the management
turnover literature that CFO turnover is more likely when the incumbent CFO possesses lower professional qualications.
Prior research typically focuses on poor company performance as the impetus to management turnover. However, poor
performance preceding turnover could be due, to some extent, to weak managerial qualications. In addition, our results
show that CFO turnover following the implementation of SOX 404 is negatively associated with CFO turnover preceding
that event. This nding indicates the desirability of controlling for pre-event turnover in a study examining post-event
turnover.
Table 5 reports model (3) tests of determinants of qualications improvement among newly hired CFOs. The models are
estimated using a sub-sample of 342 companies that had CFO turnover in 2005 and for which required data were available.
The strongest explanatory variable for all three measures of CFO improvement is ADVERSE. Companies receiving adverse
SOX 404 opinions early in 2005 are more likely to hire improved CFOs. This supports H3. Results for control variables show
that companies having CEOs who serve as chairs of boards, and having prior CFOs who possess greater experience
(CFOEXP04) are less likely to hire improved CFOs (CFOIMPROVE).16 Larger companies are less likely to hire CFOs having
better accounting credentials, while companies with higher leverage are more likely to hire CFOs with better accounting
credentials (ACCTIMPROVE).
To summarize, empirical results in Tables 4 and 5 suggest that if a company receives an adverse SOX 404 opinion, it is
more likely to subsequently hire a new CFO, and the new CFO typically is more qualied than the previous CFO. While
hiring a new CFO might result from the punitive ring of the former CFO, hiring a more qualied CFO likely reects
attempts to improve internal controls over nancial reporting and, thereby, gain improved future SOX 404 opinions.
5.4. Determinants of improvement in SOX 404 opinions (H4 and H5)
Table 6 provides logistic regression results for H4 (left-side results columns) and H5 (right-side results columns).
The regressions are conducted using the 383 companies that received adverse initial SOX 404 opinions and for which
15
When we delete 386 companies whose CFOs were hired in 2004, the results of estimating model (2) are essentially the same as shown in Table 4.
16
CFOACCT04 is not included in the models where ACCTIMPROVE or CFOIMPROVE is the dependent variable. The dichotomous nature of variable
CFOACCT04 makes improvement on this dimension impossible when CFOACCT04 is coded as 1 for the preceding CFO.
ARTICLE IN PRESS
Table 5
Logistic regression results explaining new CFO qualications improvement.
Variables +/ Model (3a) DepVar = Model (3b) DepVar = Model (3c) Dep
ACCTIMPROVE (H3) EXPIMPROVE(H3) Var = CFOIMPROVE (H3)
Coefcient Wald w2 Coefcient Wald w2 Coefcient Wald w2
Intercept 2.531 2.098 0.910 0.245 1.878 0.541

ADVERSE + 1.100 11.943*** 0.853 6.080*** 1.471 11.314***
LnASSET ? 0.180 4.799** 0.073 0.716 0.154 1.629
LEVERAGE + 0.935 2.260* 0.258 0.142 0.853 0.961
INDADJROA ? 0.746 1.207 0.301 0.173 0.694 0.542
GROWTH ? 0.110 0.157 0.138 0.210 0.116 0.076
INDADJRETURN ? 0.243 0.670 0.077 0.053 0.003 0.000
RESTATE + 0.182 0.336 0.344 0.930 0.412 0.857
CEOCHAIR ? 0.345 1.886 0.616 4.990** 0.909 5.597***
INDEPDIR ? 0.132 0.019 1.072 0.968 0.160 0.012
INSTIOWN ? 0.279 0.365 0.114 0.049 0.014 0.000
SOX302DIS + 0.150 0.073 0.084 0.021 1.359 1.558
CFOACCT04a 0.051 0.029
CFOEXP04 0.119 0.672 0.749 22.426*** 0.553 7.548***
Total Obs. = 342 342 342

CFO Improvement Obs. = 115 94 42
w2 = 31.803*** 50.891*** 32.122***
Pseudo R2 = 0.123 0.200 0.198
a
CFOACCT04 is not included in the models where ACCTIMPROVE or CFOIMPROVE is the dependent variable. If CFOACCT04 =1 (i.e. if a rms CFO
in 2004 is a CPA or has public accounting rm working experience), dependent variables ACCTIMPROVE and CFOIMPROVE must be coded as 0.
The dichotomous nature of variable CFOACCT04 makes improvement on this dimension impossible, when CFOACCT04 is coded as 1 for the preceding
CFO.
Table 6
Logistic regression results explaining SOX 404 opinion improvement.
Variables +/ Model (4) DepVar = +/ Model (5) DepVar =

OPINIMPROVE (H4) OPINIMPROVE (H5)
Coefcient Wald w2 Coefcient Wald w2
Intercept 0.809 0.251 0.441 0.063

CFOTURN05 + 0.190 0.409 2.174 10.628***
ACCTIMPROVE + 1.828 8.142***
EXPIMPROVE + 1.425 5.076**
CFOOUTSIDE + 1.084 2.923**
CFOACCT05 + 0.479 2.474*
CFOEXP05 + 0.139 0.628
LnASSET + 0.056 0.421 + 0.088 0.943
LEVERAGE 0.592 1.063 0.478 0.641
INDADJROA + 3.323 8.936*** + 3.784 9.820***
GROWTH 0.839 3.910** 0.730 3.054*
INDADJRETURN + 0.137 0.142 + 0.054 0.020
BIG4 ? 0.071 0.034 ? 0.285 0.495
RESTATE 0.121 0.204 0.041 0.021
RECEIVABLE 1.129 2.670* 0.995 1.888*
INVENTORY 2.217 3.635** 2.589 4.324**
SEGMENT 0.543 9.720*** 0.549 9.090***
RESTRUCT 0.344 1.620* 0.481 2.827**
GENERAL 0.152 0.299 0.114 0.147
CFOTURN04 ? 0.772 4.612** ? 0.772 4.513**
Total Obs. = 383 383

Opinion Improvement Obs. = 282 282
w2 = 44.864*** 72.974***
Pseudo R2 = 0.162 0.253
ARTICLE IN PRESS
second year (2005) opinions and other required data are available. The dependent variable is OPINIMPROVE ( =1 if a
companys second year SOX opinion improves from adverse to clean, =0 otherwise). In the left-side results columns,
CFOTURN05 has a negative coefcient, contrary to expectation, but the coefcient is not signicant. This nding does not
support H4, which proposes a positive association between CFO turnover and SOX 404 opinion improvement. In the right-
side results columns, the coefcient of CFOTURN05 is signicantly negative, suggesting that companies whose new CFOs
are no better qualied than the CFOs they replace (or are less qualied) are less likely to experience internal control
improvement. The test variables of interest are ACCTIMPROVE, EXPIMPROVE, and CFOOUTSIDE. Each of these has a positive
and signicant coefcient, providing support to H5. These results suggest improved second-year opinions are more likely
for companies hiring new CFOs with better accounting credentials (ACCTIMPROVE) or more CFO experience (EXPIMPROVE)
than their predecessors, and for companies hiring CFOs externally (CFOOUTSIDE). Of the two qualication level variables,
CFOACCT05 is signicantly positive, indicating a higher level of CFO qualications contributes to an improved SOX 404
opinion.17
Results for H4 and H5 together indicate that for a company receiving an adverse SOX 404 opinion, just hiring a new CFO
is not sufcient to improve internal control quality. Instead, the company should hire a better qualied CFO.18 Results for
control variables suggest that more protable companies, faster growing companies, and companies holding more
inventory, but less receivables, are more likely to have improved SOX 404 opinions in the second year. Adverse SOX 404
opinion companies that disclose more segments, or that engage in restructuring, are less likely to have improved SOX 404
opinions in the second year. Firms having CFO turnovers in 2004, and subsequently receiving adverse SOX 404 opinions,
are less likely to experience improved SOX 404 opinions in 2005.19
6. Additional analyses
6.1. CFO qualication levels20
Our tests of H3 and H5 demonstrate that hiring better qualied new CFOs (compared to the predecessors) is associated
with prior receipt of adverse SOX 404 opinions and with subsequent receipt of improved opinions. In this section,
we repeat these analyses using CFO qualication level metrics in place of the previous qualication improvement metrics.
CFO qualication levels might be more important in some situations. For example, a CFO having ve years of CFO
experience might be replaced by one having six years of experience. Although EXPIMPROVE would be coded 1 to reect
the improvement, the new CFO is still less qualied than the new CFO of a different company who has ten years of
experience. We replicate the results of Tables 5 and 6, but use CFO qualication level metrics as dependent or explanatory
variables.
Table 7 employs the same sub-sample and explanatory variables as in Table 5. The explanatory variables generally have
the same expected signs as in Table 5.21 Dependent variables ACCTIMPROVE, EXPIMPROVE, and CFOIMPROVE are replaced
with the following dependent variables in models (3a0 ), (3b0 ) and (3c0 ):
CFOACCT05 1 if companys CFO in year 2005 has a CPA license or has worked in a public accounting rm, 0 otherwise.
CFOEXP05 Natural logarithm of the number of years the CFO has held a CFO position, as of year 2005.
CFOOUTSIDE 1 if a new CFO is hired from the outside, 0 otherwise.
These variables capture dimensions of new CFO qualication levels and are measured without reference to the expertise
of the predecessor CFOs. In Table 7, each of the three dependent variables is positively and signicantly associated with
receipt of an adverse SOX 404 opinion, suggesting companies receiving adverse SOX 404 opinions are more likely to hire
better qualied CFOs, compared to new CFOs hired by companies receiving clean 404 opinions.
Table 8 employs the same sub-sample and dependent variable as model (5) in Table 6. Explanatory variables
ACCTIMPROVE, EXPIMPROVE, and CFOIMPROVE are replaced with the three qualication level variables dened above.
17
This result reects the effect of CFOs qualication levels for a pooled sample of turnover rms and non-turnover rms. In the section on additional
analyses we investigate the effect of qualication levels separately for turnover and non-turnover rms.
18
Because companies governance in general may affect the improvement of their internal controls, it is important to know whether this
improvement is associated with the new CFOs or is associated with changes in overall governance of the company. To examine this, we collect 2004 data
for variables CEOCHAIR, INDEPDIR, and INSTIOWN from companies 2005 proxy statements. Then we compute the changes in those variables. When we
add change variables to model (5), the results (not tabulated) remain the same as in Table 6, and none of the governance change variables are signicant.
19
Table 3 shows that companies hiring new CFOs in 2004 are less likely to receive adverse SOX 404 opinions. The sample companies underlying
Table 6 include the subset of companies that hired new CFOs in 2004 but that still received adverse opinions. We speculate that these companies had
more severe internal control problems than other companies in Table 6 sample, on average. If so, the difference in severity is not captured by variable
GENERAL, which is included in Table 6 models.
20
We thank the reviewer for suggesting this investigation.
21
In Table 7, we do not specify expected signs for explanatory variables CFOACCT04 and CFOEXP04 due to lack of a strong rationale applicable to all
three dependent variables.
ARTICLE IN PRESS
Table 7
Regression results explaining the levels of new CFO qualications.
Variables +/ Model (3a0 ) DepVar = CFOACCT05 Model (3b0 ) DepVar = CFOEXP05 Model (3c0 ) DepVar= CFOOUTSIDE
Coefcient Wald w2 Coefcient t-stat. Coefcient Wald w2
Intercept 3.827 5.277** 0.505 0.630 0.402 0.060

ADVERSE + 1.066 10.456*** 0.537 3.450*** 0.754 5.417***
LnASSET ? 0.234 9.081*** 0.000 0.000 0.014 0.033
LEVERAGE + 0.467 0.583 0.147 0.500 1.153 3.512*
INDADJROA ? 0.378 0.322 0.006 0.020 0.396 0.352
GROWTH ? 0.033 0.015 0.009 0.070 0.129 0.223
INDADJRETURN ? 0.057 0.036 0.092 0.640 0.166 0.308
RESTATE + 0.471 2.014* 0.002 0.010 0.634 3.614**
CEOCHAIR 0.358 2.171* 0.174 1.480* 0.407 2.772**
INDEPDIR + 0.073 0.006 0.406 0.910 2.179 5.421***
INSTIOWN + 0.051 0.013 0.135 0.620 0.123 0.076
SOX302DIS + 0.956 2.716* 0.226 0.820 0.749 1.652
CFOACCT04 ? 0.531 4.309** 0.124 1.010 0.011 0.002
CFOEXP04 ? 0.405 7.914*** 0.151 2.200** 0.410 7.835***
Total Obs. = 342 342 342

w2 = 43.703*** 45.937***
F-value = 2.080**
Pseudo R2 = 0.160 0.168
R2 = 0.040
To differentiate the effect of new CFO qualication level on opinion improvement, we interact the level variables with
CFOTURN05. The revised model is22
OPINIMPROVE a b1 CFOTURN05 b2 CFOACCT05
b3 CFOEXP05 b4 CFOTURN05 CFOACCT05
b5 CFOTURN05 CFOEXP05
b6 CFOOUTSIDE b7 LnASSET b8 LEVERAGE
b9INDADJROA b10 GROWTH b11 INDADJRETURN
b12 BIG4 b13 RESTATE b14 RECEIVABLE
b15 INVENTORY b16 SEGMENT b17 RESTRUCT
b18 GENERAL b19 CFOTURN04: 50
The coefcient of CFOTURN05 captures the intercept shift for a company that hires a new CFO in 2005 and for whom
variables CFOACCT05, CFOEXP05, and CFOOUTSIDE all are coded zero.23 The coefcient of CFOTURN05 remains negative
and signicant as in model (5). CFOACCT05 and CFOEXP05 represent qualication levels of incumbent CFOs who have not
been replaced in 2005. We do not specify an expected sign for these coefcients, and they do not differ from zero in
Table 8.24 The test variables of interest are CFOTURN05CFOACCT05, and CFOTURN05CFOEXP05. Both interactions are
positive and signicant, indicating that hiring new CFOs who have higher levels of accounting credentials or higher levels
of experience, compared to other newly hired CFOs, is associated with the receipt of improved SOX 404 opinions.
In summary, results of tests presented in Tables 5 and 7 suggest that companies receiving an adverse SOX 404 opinion
in 2005 tend to (1) hire new CFOs who are better qualied than those they replace, or (2) hire new CFOs who are more
qualied than new CFOs of companies that received favorable opinions. Results of tests presented in Tables 6 and 8
indicate that companies receiving an adverse SOX 404 opinion in 2005 are more likely to receive improved subsequent
opinions (1) if they hire new CFOs who are better qualied than those they replace or (2) if they hire new CFOs who are
more qualied than new CFOs that other adverse opinion companies are hiring.
6.2. Factors that inuence CFOs ability to address control deciencies within a year
Our main analysis nds that rms hiring improved CFOs in year 2005 are better at achieving improved SOX 404
opinions for scal year 2005. However, not all improved CFOs are able to x their companies control deciencies within a
22
We do not include the qualication improvement variables in model (5) due to their high correlations with the interacted qualication level
variables. The correlation between CFOTURNCFOACCT05 and ACCTIMPROVE is 0.832. The correlation between CFOTURN*CFOEXP05 and EXPIMPROVE is
0.767.
23
For continuous variable CFOEXP05, a coding of zero would represent no prior experience as CFO.
24
Companies having more-qualied CFOs generally should be more likely to receive improved opinions. On the other hand, these are the same CFOs
responsible for the adverse SOX 404 opinions in the rst place.
ARTICLE IN PRESS
Table 8
Logistic regression results explaining SOX 404 opinion improvement using the levels of new CFO qualications.
Variables +/ Model (50 ) DepVar =OPINIMPROVE
Coefcient Wald w2
Intercept 0.338 0.036

CFOTURN05 2.990 12.954***
CFOACCT05 ? 0.103 0.095
CFOEXP05 ? 0.012 0.003
CFOTURN05*CFOACCT05 + 2.304 11.549***
CFOTURN05*CFOEXP05 + 0.723 3.862**
CFOOUTSIDE + 0.800 1.552
LnASSET + 0.111 1.466
LEVERAGE 0.547 0.825
INDADJROA + 4.164 11.505***
GROWTH 0.802 3.423*
INDADJRETURN + 0.036 0.009
BIG4 ? 0.061 0.023
RESTATE 0.139 0.237
RECEIVABLE 1.380 3.467**
INVENTORY 2.475 4.039**
SEGMENT 0.502 7.452***
RESTRUCT 0.450 2.413*
GENERAL 0.108 0.130
CFOTURN04 ? 0.770 4.453**
Total Obs. = 383

w2 = 74.114***
Pseudo R2 = 0.257
year. We investigate next what factors inuence the ability of a new and better qualied CFO to address SOX 404
deciencies. We identify three such factors: (1) the length of time the new CFO has to improve the internal control quality;
(2) the level of the new CFOs qualications; and (3) the inherent difculty posed by the type of SOX 404 material weakness
that the CFO must x. Factor (1), length of time, is calculated as the number of days between the CFOs effective (hiring)
date and scal year end of 2005. Factor (2), level of CFO qualication, includes CFO accounting credentials (CFOACCT05)
and years of CFO experience (CFOEXP05). Factor (3), the types of material weakness, refers to general or specic material
weakness. We expect that among new CFOs with improved qualications, those hired earlier in the year will have a better
chance of eliminating control weaknesses by year-end. Those having higher qualication levels will be more able to
achieve timely correction of the control problems. Finally, those facing specic rather than general material weaknesses
will be more likely to improve internal controls by year-end because specic weaknesses are easier to x.
The test sample in Panel A of Table 9 includes 68 new CFOs with improved qualications (dened as either
ACCTIMPROVE= 1 or EXPIMPROVE =1), hired by companies after receiving adverse SOX 404 opinions for 2004. We
compare the average value of each of the three factors between those that achieved improved SOX 404 reports in 2005
(56 companies), and those that did not (12 companies). Univariate t-test results presented in Panel A of Table 9 support the
importance of all three factors in explaining why certain newly hired, improved CFOs are able to x material weaknesses
within one year. For completeness, we include in Panel B of Table 9 similar difference-in-mean tests using a sub-sample of
companies hiring new CFOs who do not have better qualications than their predecessors. We nd that opinion
improvement is associated with new CFOs having a higher level of accounting qualications. This provides further
evidence of the importance of the CFOs qualication levels. No signicant differences are observed for the other factors.
6.3. Adverse SOX 404 opinions, restatements, and CFO turnover
Prior research nds companies are more likely to experience top management turnover (of CEO, chair, or president)
after a restatement (Desai et al., 2006). Our un-tabulated correlations indicate a signicant positive association between
restatement occurrence and the adverse opinion variable (correlation= 0.415). We perform additional analysis to explore
whether occurrence of restatements affects the relation between adverse SOX 404 opinions and CFO turnover. In previous
analyses, we control for restatements (RESTATE) when explaining CFO turnover and new CFO qualication improvement.
The variable is not signicant in any of the models. A separate analysis shows that without the adverse SOX 404 opinion
variable (ADVERSE) in the model, restatement by itself is positively and signicantly related to CFOTURN05 (p =0.048) and
to ACCTIMPROVE (p = 0.005). However, these associations go away when we add ADVERSE to the models. The interaction
between RESTATE and ADVERSE is also not signicant in explaining either CFO turnover or improvement in new CFO
qualications. Together, these ndings suggest that among rms receiving adverse SOX 404 opinions, those having
ARTICLE IN PRESS
Table 9
Factors inuencing new CFOs ability to remedy SOX 404 material weaknesses within one year.
Opinion improves Opinion does not improve Difference in mean test

(OPINIMPROVE= 1) (OPINIMPROVE= 0)
Panel A: CFO improves N = 56 N= 12

(ACCTIMPROVE =1 or EXPIMPROVE = 1) Mean Mean t-stat. p-value
DAYS 228 DAYS 191 1.45 0.076

CFOACCT05 0.857 CFOACCT05 0.583 2.24 0.014
CFOEXP05 1.672 CFOEXP05 1.074 1.91 0.030
GENERAL 0.467 GENERAL 0.833 3.35 0.001
Panel B: CFO does not improve N = 14 N= 18

(ACCTIMPROVE =0 and EXPIMPROVE = 0) Mean Mean t-stat. p-value
DAYS 184 DAYS 151 0.90 0.187

CFOACCT05 0.571 CFOACCT05 0.222 2.10 0.022
CFOEXP05 1.144 CFOEXP05 0.932 0.65 0.261
GENERAL 0.429 GENERAL 0.389 0.22 0.414
The p-values are one-tailed reecting directional expectations.

Variable DAYS equals the number of days between the CFOs hiring date and the end of scal year 2005. See Table 2 for other variable denitions.
restatements and those without restatements have equal likelihood of experiencing CFO turnover and of hiring better
qualied CFOs.
7. Conclusions
Under Section 404 of the SOX Act, material weaknesses in corporations internal control over nancial reporting are
disclosed in SEC lings. Recent high-prole nancial scandals and increasing instances of restatements have focused more
attention on the role of CFOs in maintaining the integrity of corporate nancial reporting and underlying internal control
processes. This study attempts to provide a comprehensive understanding of the interrelationships among CFOs
professional qualications, internal control weakness, CFOs turnover, CFOs qualication improvement, and correction of
material weaknesses.
We nd rms with initial adverse SOX 404 opinions have less qualied CFOs, i.e., lacking nancial accounting knowledge,
or having shorter working experience as CFOs, or both. This indicates that CFO qualication is an important determinant of
internal control quality. Consistent with our expectation, adverse SOX 404 opinion recipients experience more CFO turnover
in the subsequent year, and these rms are more likely to hire better qualied CFOs. We further examine the association of
CFO turnover and SOX 404 opinion improvement in the subsequent year. Results show that simply hiring a new CFO is not
associated with SOX 404 opinion improvement. Opinion improvement requires hiring a better qualied CFO. These ndings
conrm the important role of the professional qualications of newly hired CFOs in determining internal control quality.
Moreover, these ndings provide useful practical implications to guide rms actions to improve internal controls.
Additional analyses investigate whether levels of CFO qualication play the same roles as changes in CFO qualication.
We nd that companies changing CFOs after receiving initial adverse SOX 404 opinions tend to hire better qualied CFOs than
those changing CFOs after receiving clean opinions. Among companies that receive adverse SOX 404 opinions, those hiring new
CFOs with higher qualication levels are more likely to receive favorable subsequent SOX 404 opinions. Thus the association
between adverse opinions and qualications of newly hired CFOs, and the association between new CFO qualications and
subsequent improvement in internal controls, is the same whether the qualications of new CFOs are compared with their
predecessor CFOs (i.e., change in qualications) or compared with all other CFOs in the sub-samples (i.e., qualication levels).
Additional analyses nd that a new CFO with improved qualications is more likely to improve the rms SOX 404
opinion within one year if the new CFO is hired earlier in the year, has a higher level of qualications relative to other new
CFOs, or faces less severe control problems. A nal supplemental test nds the likelihood that rms receiving adverse SOX
404 opinions subsequently will hire more qualied CFOs is not affected by the occurrence of restatements.
As the rst academic study of CFO turnover in the context of SOX 404 internal control evaluations, this studys ndings
enrich the new SOX 404 literature and increase understanding by identifying CFO qualications as an important
determinant of internal control quality. Unlike prior literature investigating nancial performance as the cause of
management departure, and as the benchmark of subsequent managerial performance, this study examines CFO turnover
using a new non-nancial, yet important, metric: internal control quality. It documents the effect of adverse SOX 404
opinions on CFO turnover and subsequent new CFO quality. The study also provides a better understanding of CFO
turnover, which is desirable given the limited existing literature. By exploring the associations among CFO turnover,
change in CFO qualications, initial SOX 404 opinions, and its subsequent improvement, our study provides practical
implications for possible corporate actions to x control weaknesses.
ARTICLE IN PRESS
However, the study has limitations, some of which suggest future research. The study is exploratory in nature and is an
early attempt to lay out the empirical relations between variables that are likely to be important. Future research could
explore the relations among dependent, test and control variables using additional modeling methods such as systems of
equations or path analysis. Second, we examine only the rst two years of SOX 404 opinion data. Further research can
verify whether the associations we document persist. Third, the data available do not allow us to distinguish between CFO
resignations and CFO dismissals. Subject to data availability, future research could examine these two types of CFO
departure separately in relation to adverse SOX 404 opinions. Finally, this study does not investigate the subsequent
employment of departing CFOs, which we suggest as a topic for future research.
Acknowledgements
We have beneted from comments provided by Sarah E. McVay, Karla M. Johnstone, Harry Evans, and participants at
the 2007 American Accounting Association Annual Conference. We also thank the editor, Ross Watts, and the reviewer,
Rachel Hayes, for benecial guidance.
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Financial Executive Qualifications Financial Executive Turnover and Adverse SOX

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Journal of Accounting and Economics 50 (2010) 93110

Contents lists available at ScienceDirect

Journal of Accounting and Economics

Financial executive qualications, nancial executive turnover,

2. Prior literature on management turnover

2.1. Company performance, nancial reporting failure, and management turnover

2.2. Management turnover, management qualications, and subsequent performance outcomes

4. Samples, models, and variables

4.2. Models and variables

4.2.1. Model for H1

INVENTORY inventory/total assets at the end of scal year 2004.

4.2.2. Models for H2 and H3

b11 SOX302DIS b12 CFOACCT04

4.2.3. Models for H4 and H5

OPINIMPROVE a b1 CFOTURN05 b2 LnASSET b3 LEVERAGE

OPINIMPROVE a b1 CFOTURN05 b2 ACCTIMPROVE b3 EXPIMPROVE

Fiscal Yr. 04 Fiscal Yr. 05 Fiscal Yr. 06

Initial SOX 404 CFO turnover 2nd Yr. SOX 404

Variables of primary interest

Dependent ADVERSE (H1) CFOTURN05 (H2) OPINIMPROVE (H4, H5)

Explanatory CFOACCT04 (H1) ADVERSE (H2, H3) CFOTURN05 (H4, H5)

All variables have been previously dened with the exception of

CFOOUTSIDE 1 if a new CFO is hired from outside the company, 0 otherwise.

5.1. Descriptive statistics

CFOACCT04 0.317 0.482 6.18***

Panel B: Companies with and without CFO turnover in 2005

ADVERSE 0.304 0.154 6.92***

CFOIMPROVE (=1, 0) CFOIMPROVE (= 1, 0)

ADVERSE 0.595 0.277 4.26***

OPINIMPROVE (= 1, 0) OPINIMPROVE ( =1, 0)

CFOTURN05 0.248 0.297 0.96

Variables +/ Model (1) DepVar = ADVERSE (H1)

Intercept 3.895 20.243***

Total Obs. = 2478

5.2. Determinants of adverse SOX 404 opinions (H1)

Variables +/ Model (2) DepVar = CFOTURN05 (H2)

Intercept 0.696 0.654

Total Obs. = 2358

5.4. Determinants of improvement in SOX 404 opinions (H4 and H5)

Coefcient Wald w2 Coefcient Wald w2 Coefcient Wald w2

Intercept 2.531 2.098 0.910 0.245 1.878 0.541

Total Obs. = 342 342 342

Variables +/ Model (4) DepVar = +/ Model (5) DepVar =

Coefcient Wald w2 Coefcient Wald w2

Intercept 0.809 0.251 0.441 0.063

Total Obs. = 383 383

6.1. CFO qualication levels20

Coefcient Wald w2 Coefcient t-stat. Coefcient Wald w2

Intercept 3.827 5.277** 0.505 0.630 0.402 0.060

Total Obs. = 342 342 342

Variables +/ Model (50 ) DepVar =OPINIMPROVE

Intercept 0.338 0.036

Total Obs. = 383

6.3. Adverse SOX 404 opinions, restatements, and CFO turnover

Opinion improves Opinion does not improve Difference in mean test

Panel A: CFO improves N = 56 N= 12

DAYS 228 DAYS 191 1.45 0.076

Panel B: CFO does not improve N = 14 N= 18

DAYS 184 DAYS 151 0.90 0.187

The p-values are one-tailed reecting directional expectations.

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