Does Auditor Involvement Expedite SEC Comment Letter Resolution?

• In Event: Regulation and Auditing

Abstract

The remediation of Securities and Exchange Commission (SEC) comment letters can impose significant costs on companies. This study examines whether auditor involvement in the SEC comment letter process expedites comment letter resolution. Such a finding would indicate that auditors add value outside of the annual financial statement audit. We measure auditor involvement by identifying whether the audit partner is copied on SEC correspondence, and validate such auditor involvement by showing that audit fees are higher when a partner is copied. First, we document that auditor involvement is more likely when the SEC’s comment letter relates to one or more accounting issues and when the audit partner has industry expertise. Then, we show that comment letters that copy the partner, especially a partner with greater experience, have reduced time to resolution. In particular, we show that copying the audit partner reduces the amount of time it takes the company to respond to a SEC comment letter and copying more experienced partners is associated with clearer responses to the SEC and shorter times to reach full resolution. We find no evidence that auditor reputation (e.g., partner titles or working in a firm’s national office) affects the likelihood of a company to copy the partner or the likelihood that the SEC will perceive the company’s response more favorably. Thus, our findings appear driven by actual rather than perceived auditor value.

Authors

• Ryan Ballestero, University of Texas at Austin

• Jaime J Schmidt, University of Texas at Austin