Does SEC Enforcement Improve Financial Reporting Quality?

• In Event: Accounting, Government, and Regulations

Abstract

This study examines both the direct and indirect effects of the Securities and Exchange Commission’s (SEC) accounting and auditing enforcement releases (AAERs) on financial reporting quality. While prior studies have examined consequences such as the market reaction, cost of capital, and management turnover, they have failed to investigate whether AAERs lead to improved financial reporting. The SEC is charged with facilitating capital information and therefore have an objective of improving financial reporting. I find that firm’s receiving an AAER improve their financial reporting following the release. However, the SEC has limited resources and it is important to examine whether the effect on financial reporting reaches beyond the target firm. I investigate a potential spillover channel and find that other firms with a common auditor have improved financial reporting as well. This evidence is consistent with SEC enforcement having both direct and indirect effects on financial reporting.

Author

• Ryan T Dunn, Auburn University