Does Industry Employment of Active Regulators Weaken Oversight?

Management Science, Forthcoming.

52 Pages Posted: 10 Jan 2022

See all articles by Jonas Heese

Jonas Heese

Harvard University - Business School (HBS)

Date Written: November 5, 2021


I study whether industry employment of active regulators weakens oversight. To examine this question, I exploit that the Financial Reporting Enforcement Panel (FREP), the German capital-market regulator responsible for enforcing public firms’ compliance with accounting standards, allows its senior regulators to serve on boards of public firms during their FREP tenure. I find that firms are less likely to face enforcement actions after they appoint active regulators to their board. After such an appointment, firms are more likely to receive a qualified audit opinion, more likely to have an above normal risk of accounting manipulation as measured by an F-Score greater than 1, and exhibit higher income-increasing abnormal accruals. These findings suggest that directorships of active regulators can result in conflicts of interest that weaken oversight.

Keywords: Conflict-Of-Interest Policies, Directorships, Enforcement Actions, Industry Employment, Self-Regulatory Organizations.

JEL Classification: M40, M41, M43

Suggested Citation

Heese, Jonas, Does Industry Employment of Active Regulators Weaken Oversight? (November 5, 2021). Management Science, Forthcoming., Available at SSRN:

Jonas Heese (Contact Author)

Harvard University - Business School (HBS) ( email )

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Morgan Hall 397
Boston, MA 02163
United States

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