AAA Spark Meeting of the Regions

Auditor Political Connections and SEC Oversight

• In Event: Analyzing the Audit Process

Abstract

We examine whether auditors’ political connections are associated with the Securities and Exchange Commission (SEC)’s oversight of their clients . Specifically, we test whether auditors’ Political Action Committee (PAC) contributions (after controlling for clients’ PAC contributions) affect the likelihood of the SEC issuing comment letters (CL), initiating investigations, and issuing Accounting and Auditing Enforcement Releases (AAERs) against their clients. Consistent with higher political connections inducing heightened scrutiny from the SEC, we find that the clients of auditors with higher political connections are more likely to receive CLs and face SEC investigations. Our results are more pronounced for clients with greater ex-ante fraud risk. However, conditional on being investigated by the SEC, we find no association between auditors’ political connections and the issuance 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