Corporate Governance Consequences of Accounting Scandals: Evidence from Top Management, CFO and Auditor Turnover

This paper examines the consequences of accounting scandals to top management, top financial officers and outside auditors. We examine a sample of 518 U.S. public companies that announced earnings-decreasing restatements during the 1997–2002 period and an industry-size matched sample of control firms. Using logistic regressions that control for other determinants of management turnover, we find strong evidence of greater turnover of chief executive officers (CEOs), top management and chief financial officers (CFOs) of restating firms compared to the control sample. On average, over the three-year period surrounding the year of restatement announcement, CEOs and CFOs face, respectively, a 14% and 10% greater probability of being replaced in restating firms than in control firms, after controlling for other factors. These represent increases of about 42% and 23%, respectively, compared to the usual turnover probabilities for CEOs and CFOs. The magnitudes of these effects are even larger for restatements that are more serious, have worse effects on stock prices, result in negative restated earnings, are initiated by outside parties, are accompanied by Accounting and Auditing Enforcement Releases (AAERs), or trigger securities class action lawsuits. We find little systematic evidence that auditor turnover is higher in restating firms. Our paper provides evidence of effective functioning of internal governance mechanisms following accounting scandals.