No. 141: Former Executives as Supervisors: Conflicts of Interest and Accounting Discretion

Abstract

Due to their information advantages, former executives are routinely appointed to supervisory roles within the same firm. This practice is often criticized based on concerns about former executives‘ lack of independence and potential conflicts of interest. As supervisors, one of their main tasks is to oversee the financial reporting process and to challenge management‘ s assumptions and the projections that shape reporting outcomes. This study examines the effects of transitioning managers on accounting discretion in the context of goodwill impairments. Based on a largely hand-collected sample of such transition events, we find a decreased propensity and lower magnitude of goodwill impairments following transitions. This effect is robust when controlling for the underlying economic situation of the firms. Further analyses reveal that the effect is muted when more experienced executives transition, for transitions into more independent boards, and for transitions after longer cooling-off periods. Overall, our findings suggest that former executives who become supervisors tend to impact the way accounting discretion is exercised. Thereby, we add to the assessment of an important goverance phenomenon and relate to regulatory debates around mandatory cooling-off periods and the impairment-only approach for goodwill accounting.