The Auditor Effects on the Deterrence of SEC Enforcement Actions

• In Event: Emerging Research and Research Interaction 1

Abstract

Given that the SEC is resource constrained and has limited resources to investigate potential violations of securities regulations, it would seem that the SEC is reliant on deterrence to spread via more indirect routes. This study will examine the role external auditors can play in assisting the SEC with deterring aggressive financial reporting practices. Specifically, I intend to examine whether the extent of aggressive financial reporting practices, proxied by a calculation of earnings management, is different for industry peers that use the same external auditor office as the target firm (common auditor peers) than firms that use a different external auditor office (other industry peers) around learning of the target firm’s receipt of an AAER. I also intend to examine whether this effect is stronger in cases where the auditors are named in the AAER. The results of this paper would be of interest to the business community and regulators because deterrence is an important objective of the SEC and whether the external auditor contributes to the deterrence would help to evaluate the consequences of enforcement activity of the SEC.

Author

• Kristy Schenck, Bucknell University