The Deterrence Effects of SEC Enforcement Actions

• In Event: Financial Accounting and Reporting V

Abstract

This paper examines whether SEC enforcement activity against an entity serves as a deterrent against aggressive reporting among peer firms not involved in the SEC enforcement action. I provide evidence that, in the wake of SEC enforcement activity against a firm in their industry group (“target firm”), peer firms take steps that are associated with a decreased likelihood of misreporting. This deterrence effect is more pronounced for industries in which SEC enforcement is more persistent, in cases where the activity was a more significant event for the target firm, for peer firms with more reputable auditors, and for peer firms that share the same auditors with the target firm. Additional analysis shows that the deterrence effect is greater for peer firms that have similar aggressive reporting practices to those of the target firm. In addition, deterrence is more pronounced in the post-2002 period, particularly when the increase in perceived probability of getting caught is related to SEC activity. The extent of financial statement comparability in the industry is also found to influence deterrence and the mechanisms through which deterrence is achieved.

Author

• Kristy Schenck, Bucknell University