Auditor Political Connections and SEC Oversight

• In Event: Regulation and Oversight

Abstract

We examine whether auditors’ political connections are associated with Securities and Exchange Commission (SEC)’s oversight of their clients. Specifically, we test whether Political Action Committee (PAC) contributions by auditors affect the likelihood of the SEC issuing comment letters (CL), initiating SEC investigations, and releasing Accounting and Auditing Enforcement Releases (AAERs) against their clients. Consistent with higher political connections inducing heightened scrutiny from the SEC, we document that the clients of auditors with higher political connections are more likely to receive CLs and face SEC investigations. Further, based on firm-year observations under SEC investigation, we find no association between auditors’ political connections and the release of AAERs. We interpret our findings as being inconsistent with regulatory capture.

Authors

• Jagan Krishnan, Temple University

• Meng Li, Temple University

• Hyun Jong Park, Temple University