Examining the Examiners: SEC Error Detection Rates and Human Capital Allocation
59 Pages Posted: 30 Nov 2017 Last revised: 30 Jul 2019
Date Written: October 20, 2017
I derive a measure of financial reporting error detection rates using information from SEC comment letter reviews. In a sample of 13,429 reviews covering 2005 to 2014, I find the SEC’s Division of Corporate Finance (DCF) identifies an error that results in a restatement in 4.6% of cases, while firms ultimately restate 13.6% of periods under SEC review. Using the ratio of errors the DCF directly identifies (616 or 4.6%) to total corrected errors (1,829 or 13.6%) to measure error detection rates (33.7%), I document a positive association between detection rates and the size of the DCF review team. This association is concentrated in the number of accountants assigned to the review team. I find an economically insignificant association between individual examiner error detection performance and economic or career incentives.
Keywords: SEC, comment letter, restatement, enforcement, error detection
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