Awareness of SEC Enforcement and Auditor Reporting Decisions

62 Pages Posted: 23 Jul 2016 Last revised: 2 Aug 2017

See all articles by Mark L. DeFond

Mark L. DeFond

University of Southern California - Leventhal School of Accounting; European Corporate Governance Institute (ECGI)

Jere R. Francis

Maastricht University

Nicholas Hallman

University of Texas at Austin

Date Written: July 22, 2016

Abstract

We find that non-Big 4 audit offices with greater awareness of SEC enforcement are more likely to issue first-time going concern reports to distressed clients; where SEC “awareness” is measured using (1) audit office proximity to SEC regional offices, and (2) proximity to specific SEC enforcement actions against auditors. We also show that these non-Big 4 audit offices issue more going concern opinions to clients who do not subsequently fail, indicating a conservative bias that reduces the informativeness of audit reports. This conservative reporting bias is also associated with higher audit fees and higher auditor switching rates. These findings are important because non-Big 4 firms now audit 39 percent of SEC registrants and issue 88 percent of going concern audit reports. For Big 4 offices, we find some evidence that awareness of SEC enforcement may improve reporting accuracy by reducing Type II errors (failing to issue a going concern report to a company that fails), although the number of cases is small.

Suggested Citation

DeFond, Mark and Francis, Jere R. and Hallman, Nicholas, Awareness of SEC Enforcement and Auditor Reporting Decisions (July 22, 2016). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2813374 or http://dx.doi.org/10.2139/ssrn.2813374

Mark DeFond

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Jere R. Francis

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Nicholas Hallman (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

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