CFO’s Prior Experience As Auditors And The Choice Between Real Activities Earnings Management And Accural-based Earnings Management By Listed Company

Earnings management is a common phenomenon in the capital market. Accordingto domestic and overseas studies, firms’ strong incentive to manipulate earnings arisefrom avoiding reporting annual losses, and from stock market pressure to meet analystexpectations, etc.With the development of law and regulation system, and the rising regulatorypressure, firms have switched from accrual-based to real earnings management methods.Compared with accrual-based earnings management, real activities manipulationaccomplished by normal operational practices is relatively less risky, although this twokinds of methods do not violate accounting standards.In the structure of corporate governance, CFO serves as a strategy managergradually. The accounting system is totally controlled by them, and the company’sstrategic decisions and executions are affected by them. In light of upper echelonstheory, the background of different CFOs have an impact on company’s strategicdecisions. Firms appoint to the position of CFO personnel who has the workingexperience of auditor. The CFO’s specialized knowledge of the accounting systems andpolicies can enhance his or her ability to ensure proper accounting treatment. To inspireconfidence from the board of directors, a new CFO needs to show significant progressin his or her early appointments. In this circumstance, earnings management canbecome a way to manipulate earnings. And given real activities manipulation has thefeatures such as concealing, less risky, the CFO’s prior experience as auditors may havesome impact on the choice between real activities manipulation and accrual-basedearnings management.To analyze the influence of CFO’s working experience as auditor in the choicebetween accrual-based earnings management and real activities earnings management,firms from2002to2011with CFO turnover are selected as sample. I did multipleregression from both horizontal and vertical dimensions. In horizontal analysis,compared with the firms that new CFO has no auditor background, firms that new CFOhas auditor background have a high level of real activities earnings management. Invertical analysis, the firms that new CFOs has auditor background have a high level ofreal activities earnings management, while the level of earnings management does notchange in the firms that new CFO has no auditor background.In addition, I did multiple regression from the actual controller perspective and the regulatory environment perspective. From the point of actual controller, I find that CFOwith auditor background have no influence on the choice of earnings managementmethod in the state-owned firms. On the other hand, in non-state firms, compared withthe firms that new CFO has no auditor background, firms that new CFO has auditorbackground have a high level of real activities earnings management. From the point ofregulatory environment, I find that CFOs with auditor background have no influence inthe period before the enforcement of new accounting standards. But after theenforcement of new accounting standards, compared with the firms that new CFO hasno auditor background, firms that new CFO has auditor background have a high level ofreal activities earnings management.Therefore, the conclusion of my dissertation is as follows：compared with the firmsthat new CFO has no auditor background, firms that new CFO has auditor backgroundhave a high level of real activities manipulation. The conclusion will be more obvious innon-state firms and in the period after the enforcement of new accounting standards.