Looks matter – at least for CFOs
We all know that looks can be deceiving, yet we also know that looks matter. Why do you think that products mostly bought by men (e.g. cars) are typically advertised by attractive women like this new ad from BMW featuring Gigi Hadid:
Meanwhile products geared towards women are often advertised by attractive men like the legendary Diet Coke spots:
Why do these companies do that? Because it works. And to be honest, the only reason why I added these pictures to this post is so you have something to enjoy in this article…
Now take a look at the CFO in your company. If you did not know him, would you trust him? If so, there is good news: your business is probably saving a lot of money on audit fees.
Tien-Shih Hsieh from the University of Massachusetts and his colleagues used facial recognition software to look at the pictures of 1,179 CEOs and 1,360 CFOs of 845 listed companies in the US. The CEOs and CFOs were in charge between 2001 and 2014.
In a first step, the researchers used images of the CEOs and CFOs taken from the internet and measured distinctive facial features that are traditionally linked with trustworthiness. In particular, they measured the angle of the eyebrows, the shape of the face and the width of the chin. Previous studies have shown that people with rounder faces, wider chins and more arched eyebrows are generally perceived to be more trustworthy. In contrast, people with narrow chins, elongated faces and flat eyebrows are considered to be less trustworthy by the public.
The researchers could replicate these findings with their set of pictures of CEOs and CFOs which allowed them to look at the relationship between facial trustworthiness of executives and the audit fees the companies paid.
It turns out that audit firms offer a significant fee discount for CFOs that look more trustworthy but not for CEOs. The effect is particularly strong when a new audit firm is hired, and the two parties do not know each other that well. Holding other things such as company profitability, credit risks etc. equal, a CFO with a face in the top quartile of trustworthiness gets a 5.6% discount in audit fees. That may not sound like much but given the average annual audit fee in their sample of $4.3m, this discount is worth $242,000. The median audit fee is lower at $2.25m, but even then the discount is worth $126,000.
Over time, the discount granted by audit firms narrows, but it takes many years for fees to approach the levels of audit fees for firms with CFOs that don’t look trustworthy. Over 15 years, a “top quartile” CFO can save the company $108,000 per year in audit fees. So next time your CFO quits, you might want to hire someone with a trustworthy face and then change auditors. This way, your new CFO practically pays for himself…
CFO facial trustworthiness, audit fees and audit tenure
Source: Hsieh et al. (2019). The horizontal axis shows audit tenure in years, the vertical axis shows the median audit fees in natural logarithms (13 = $442,413, 14 = $1.2m, 15 = $3.27m)