Wearing Out the Watchdog: The Impact of SEC Case Backlog on the Formal Investigation Process

59 Pages Posted: 31 Aug 2021

See all articles by Samuel B. Bonsall

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting

Eric Holzman

The Ohio State University - Department of Accounting & Management Information Systems

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting

Date Written: June 29, 2021

Abstract

We examine a comprehensive set of investigations by SEC Division of Enforcement offices to provide evidence on the consequences of busyness on the formal investigation process. Our evidence suggests that higher office case backlog decreases the likelihood of investigation initiation. Consistent with the SEC’s commitment to its stated priorities, our results show no evidence that higher backlog affects the SEC’s ability to pursue cases with revenue recognition concerns and high insider trading. Surprisingly and inconsistent with SEC priorities, our findings indicate that busy SEC offices are less likely to pursue cases with the largest shareholder losses — likely because large-loss cases take longer to close. Backlog also appears to impact pursued investigations, leading to longer investigations, a lower AAER likelihood, and smaller SEC or DOJ penalties. Our final analyses provide modest small sample evidence that uninvestigated firms exhibit lower earnings quality and returns in future periods. Collectively, our evidence suggests that busyness impacts the investigation process, ranging from case priorities to sanctions and penalties assessed.

Keywords: SEC enforcement, investigations, misreporting, financial misconduct

JEL Classification: G18, G38, K42, M41

Suggested Citation

Bonsall, Samuel B. and Holzman, Eric and Miller, Brian P., Wearing Out the Watchdog: The Impact of SEC Case Backlog on the Formal Investigation Process (June 29, 2021). Available at SSRN: https://ssrn.com/abstract=3912645 or http://dx.doi.org/10.2139/ssrn.3912645

Samuel B. Bonsall (Contact Author)

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Eric Holzman

The Ohio State University - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2606 (Phone)

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