Examining the Examiners: SEC Error Detection Rates and Human Capital Allocation

58 Pages Posted: 30 Nov 2017 Last revised: 18 Oct 2018

See all articles by Matthew Kubic

Matthew Kubic

Duke University - Fuqua School of Business

Date Written: October 20, 2017


I apply Becker’s (1968) economic theory of crime, which shows that detection rates are an important determinant of enforcement outcomes, to analyze the SEC’s effectiveness in detecting financial reporting errors. I derive a measure of error detection rates using information from SEC comment letter reviews. In a sample of 13,504 reviews covering 2005 to 2014, I find the SEC’s Division of Corporate Finance (DCF) identifies an error that results in a restatement in 4.7% of cases, while firms ultimately restate 13.8% of periods under SEC review. Using the ratio of errors the DCF directly identified (4.7%) to total errors (13.8%) to measure error detection rates (34.0%), I document a positive association between the human capital allocated to a review and detection rates, and heterogeneity among examiners. DCF review teams without an accountant are less likely to detect errors. I find little association between examiner performance and economic or career incentives.

Keywords: SEC, comment letter, restatement, enforcement

Suggested Citation

Kubic, Matthew, Examining the Examiners: SEC Error Detection Rates and Human Capital Allocation (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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