Jagadison Aier, Joseph Comprix, Matthew Gunlock, and Deanna Lee wrote "The Financial Expertise of CFOs and Accounting Restatements," which appeared in the September 2005 issue of Accounting Horizons. The first sentence of the paper states that their purpose is to explore whether there is an association between the two, and clearly they expect a negative correlation between financial expertise and accounting restatements. But why should we study this question and of what interest is it to the reader?

To bring the reader into their arena, the authors introduce a variety of anecdotal evidence that CFOs in recent years have greater skills in investments and finance and relatively less in accounting. (Even so, can't they hire and manage accounting experts to perform those tasks?) To this the authors add evidence that earnings restatements lead to stock price declines. (Gee, what a surprising result!)

So Aier, Comprix, Gunlock, and Lee gather their data and find a negative association between financial expertise of CFOs and accounting restatements. They conclude that business enterprises should employ CFOs who have a better knowledge of financial reporting so they do not suffer the economic consequences of financial restatements. Indeed, some firms are already seeking such changes in their CFOs.

We should not put too much stock into this research for a variety of reasons. First, the results yield a pseudo R-squared of 0.05. This finding implies that financial expertise (plus several moderating variables) explains only five percent of the variation in accounting restatements so that 95 percent of the variation in accounting restatements remains unexplained. Some of this residual variation may be random, but I doubt that most of it is unsystematic. Until researchers can explain this 95 percent, I am not going to get too excited about the research.

An obvious omitted variable concerns the external auditors. Perhaps some CPAs are relatively weak in financial accounting. After all, some Big Four accountants keep their jobs because of their selling skills rather than their knowledge of financial reporting. Perhaps some CPAs are strong in financial accounting but weak in the practice of accounting ethics, especially when consulting dollars are on the line. If nothing else, the lure of consulting dollars served as a powerful incentive during the last decade for auditors to look the other way. Therefore, some accounting restatements are probably the result of a nonchalant attitude by CPAs during their audits.

The biggest problem in the study is that it ignores the ethical stance of the CFOs, perhaps because of the difficulty of measuring this variable. If this were the case, I would expect the authors to state the concern in their paper. They don't; in fact, they say very little about accounting ethics. We have to infer that they either consider ethics unimportant or, more likely, they consider ethics a function of expertise. Even so, that is a dangerous and incorrect proposition. I know too many ethical people with little education to believe the myth that education makes people ethical. Likewise, I know plenty of individuals with lots of education and lots of expertise but little concern for others. Education and ethics are not necessarily linked.

The authors also miss a very big hole in their logic. A CFO could have great accounting acumen so that his or her firm does not experience any accounting restatement. This situation could mask the CFO's ability to commit and hide an accounting fraud, something that should receive an accounting restatement. After all, the lack of accounting restatements does not imply that the firm has fairly presented the results of the business entity; instead, it might indicate its success in hoodwinking everybody else.

Treating accounting restatements in an amoral fashion is disappointing. Handling ethical issues in a technical format obscures the real nature of the problem and suggests solutions that do not and will not work. The authors of this paper and indeed the reviewers and the editors at Accounting Horizons let us down by pretending otherwise.

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J. EDWARD KETZ (edketz@psu.edu) is accounting professor at The Pennsylvania State University Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals.