For Less Corporate Fraud, Hire Female CFOs

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

National Journal

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.