For Less Corporate Fraud, Hire Female CFOs

Women are less prone to risky tax-avoidance measures that could lead to illegalities.

National Journal
Gillian B. White, The Atlantic
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Gillian B. White, The Atlantic
Feb. 24, 2015, 7:15 a.m.

After a re­ces­sion that tanked the eco­nomy and re­vealed the shady deal­ings as­so­ci­ated with subprime mort­gages, state­ments of cor­por­ate in­come, and oth­er prob­lem­at­ic busi­ness prac­tices, it’s nat­ur­al that many re­main sus­pi­cious of how large com­pan­ies op­er­ate — and con­cerned about the far-reach­ing con­sequences of their mor­al fail­ings.

Taxes have be­come an in­creas­ingly im­port­ant part of the con­ver­sa­tion, es­pe­cially when it comes to dis­cus­sions about cor­por­ate-tax rates and loop­holes, which then brings up ques­tions about which groups do or do not pay their fair share of taxes. Ac­cord­ing to a new study from Wake Forest and the Uni­versity of North Car­o­lina (Wilm­ing­ton), the IRS es­tim­ates that in 2006, cor­por­ate-tax eva­sion was re­spons­ible for around $67 bil­lion in losses. And be­fore that, un­eth­ic­al be­ha­vi­or re­lated to the re­port­ing of cor­por­ate fin­ances was also an is­sue in ma­jor cases of fraud, in­clud­ing those of World­Com and En­ron.

In the ef­fort to com­bat fraud, the role of chief fin­an­cial of­ficer is es­pe­cially crit­ic­al, since the job re­quires sign­ing off on, and cer­ti­fy­ing the ac­cur­acy of some fin­an­cial state­ments for firms that re­port to the SEC. That makes com­pany CFOs one of the primary lines of de­fense when it comes to fair and ac­cur­ate fin­an­cial re­port­ing and pre­ven­tion of un­eth­ic­al fin­an­cial be­ha­vi­or. But a 2012 study by Ernst and Young found that “15 per­cent of CFOs in­dic­ated they would be will­ing to com­mit fraud to win busi­ness, and 4 per­cent said they would be will­ing to in­ten­tion­ally mis­state fin­an­cial per­form­ance.” And that’s just the CFOs who were will­ing to ad­mit to such views. A 2014 ver­sion of that same study on glob­al fraud found that 7 per­cent of CFOs said they would be will­ing to mis­state com­pany fin­ances in or­der to help weath­er tough eco­nom­ic times. “CFOs are more likely than any oth­er role to jus­ti­fy mak­ing changes to as­sump­tions re­lat­ing to valu­ations and re­serves to meet fin­an­cial tar­gets,” the study found.

Al­though cor­por­ate eth­ics and mor­al­ity have been stud­ied at length, es­pe­cially as re­lated to the size of a firm or to ex­ec­ut­ive com­pens­a­tion, the new study from re­search­ers at Wake Forest and UNC Wilm­ing­ton takes a look at a dif­fer­ent char­ac­ter­ist­ic of a com­pany’s lead­er­ship — gender — as a means of de­term­in­ing how eth­ic­ally a com­pany’s high­er-ups be­have when it comes to pay­ing taxes and re­port­ing in­come.

How does gender factor in? The re­search shows that, in gen­er­al, fe­male CFOs were less prone to ris­ki­er tax-avoid­ance meas­ures that could lead to il­leg­al ac­tions, such as tax eva­sion. There could be a couple of reas­ons for wo­men’s more-eth­ic­al be­ha­vi­or when it comes to ac­cur­ately re­port­ing a com­pany’s fin­ances. For one thing, the pa­per cites earli­er re­search find­ings that wo­men tend to be more driv­en by de­sire for growth and de­vel­op­ment, while men are gen­er­ally more driv­en by the pur­suit of money and power — which could lead men to make de­cisions based strictly on eco­nom­ics rather than oth­er factors, like a sense of fair­ness or pro­pri­ety.

But even if fe­male CFOs are more likely to be­have mor­ally, hav­ing a wo­man in one of the top po­s­i­tions in a com­pany isn’t enough to en­sure that an in­creased sense of cor­por­ate eth­ics will per­meate all of the com­pany’s op­er­a­tions when it comes to re­port­ing, and pay­ing, taxes. Ac­cord­ing to the study, “Minor­ity opin­ions are of­ten over­looked. In the pres­ence of a male-dom­in­ated board, a fe­male CFO may be viewed as a sym­bol or a token and thus may not be able to ex­ert suf­fi­cient in­flu­ence over cor­por­ate tax de­cisions.” So if ap­point­ing a wo­man to the po­s­i­tion re­spons­ible for over­see­ing and re­port­ing on fin­an­cial activ­ity isn’t enough, what would it take?

The study sug­gests that a com­pany’s board may also need to ad­just its gender rep­res­ent­a­tion. Ac­cord­ing to the re­search, a board needs to have a “crit­ic­al mass” of fe­male mem­bers in or­der to be­come less likely to com­mit fraud.

Boards that had a bet­ter bal­ance of men and wo­men had few­er SEC vi­ol­a­tions and were gen­er­ally more trans­par­ent when it came to fin­ances, ac­cord­ing to the re­port. The study finds that for a fe­male CFO to be highly ef­fect­ive when it comes to re­du­cing the like­li­hood of tax eva­sion, the pres­ence of even one oth­er wo­man in a high-powered board po­s­i­tion could serve to re­duce the chances of un­eth­ic­al tax be­ha­vi­or with­in the com­pany.

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