Examining the Examiners: SEC Effectiveness in Identifying Financial Reporting Errors

59 Pages Posted: 30 Nov 2017  

Matthew Kubic

Duke University - Fuqua School of Business

Date Written: October 20, 2017

Abstract

I examine the effectiveness of the SEC Division of Corporate Finance (DCF) comment letter process. In a sample of 17,624 financial statement reviews covering 2005 to 2014, the DCF identifies an error that results in a restatement in 6.3% of cases, and in 7.0% of cases fails to identify an error that results in a restatement. I use the ratio of errors identified (1,114 or 6.3%) to total errors (2,342 or 13.3%) as a measure of effectiveness (47.6%). The DCF is more (less) likely to detect severe errors and errors related to long-term assets and financial statement presentation (income taxes). Enforcement intensity increases the likelihood of detecting an error, while errors are more likely to be missed during periods of above average workload. The economic reward to a DCF examiner for identifying an error is less than $1,000 per error and individual examiners differ in their ability to detect errors.

Keywords: SEC, comment letter, restatement, enforcement

Suggested Citation

Kubic, Matthew, Examining the Examiners: SEC Effectiveness in Identifying Financial Reporting Errors (October 20, 2017). Available at SSRN: https://ssrn.com/abstract=3078689 or http://dx.doi.org/10.2139/ssrn.3078689

Matthew Kubic (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120, Fuqua School of Business
Durham, NC 27708-0120
United States

HOME PAGE: http://sites.duke.edu/mattkubic/

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