Financial Reporting Oversight and Resource Constraints: Evidence from SEC Comment Letters

• In Event: SEC Comment Letters

Abstract

Compliance and enforcement play important roles in the financial reporting oversight function of the U.S. Securities and Exchange Commission (SEC). SEC compliance actions include conducting filing reviews and issuing comment letters. Prior literature examining the SEC’s compliance role focuses on the firm characteristics that affect the probability and consequences of receiving a comment letter; prior literature examining SEC resource constraints focuses on the role of enforcement. In contrast to prior literature, we examine how resource constraints at the SEC affect their compliance role. We construct a measure to proxy for SEC busyness at the time a firm files its annual 10-K report. We find that the SEC is less likely to issue a comment letter when a firm files during a busy period and that comment letters are more likely during less busy periods. Further analysis reveals that when busy, the SEC focuses on firms for which they have a reason to suspect a compliance issue and, conditional on comment letter receipt, more serious compliance issues. Overall, we find that the SEC issues less comments letters when busy, but the SEC focuses its limited staff resources on firms at higher risk for noncompliance and more serious issues.

Authors

• Katherine Ann Gunny, University of Colorado Boulder

• Judith Hermis, University of Colorado Boulder