Forced Remediation: The Use of Corporate Monitors in Sanctions for Misconduct

55 Pages Posted: 27 Apr 2022 Last revised: 2 May 2022

See all articles by Rebecca Files

Rebecca Files

University of Texas at Dallas

Gerald S. Martin

American University - Kogod School of Business

Yan (Tricia) Sun

Central Michigan University - School of Accounting

Date Written: May 2, 2022

Abstract

Following securities law violations, regulators can require firms to hire a corporate monitor. These monitors are akin to consultants and are tasked with improving a firm’s financial reporting policies and internal controls. Monitors are embedded within a corporation at the behest of the government, though, which adds an adversarial component to their job. We examine the efficacy of these monitors in practice by first documenting the determinants of the monitorship requirement. We find that corporate monitors are prevalent following bribery and severe financial misconduct, but firms that initiate their own internal investigation are less likely assigned a monitor. Consistent with theory, we also find a positive association between monitors and firm monetary penalties. Finally, violating firms assigned a corporate monitor experience increased financial reporting credibility and reduced audit fees relative to other violating firms. Our study suggests that both investors and auditors perceive monitors to be beneficial to the firm.

Keywords: Regulatory enforcement, corporate monitors, internal investigation, cooperation

JEL Classification: K22, M14, M41, M42, M48

Suggested Citation

Files, Rebecca and Martin, Gerald S. and Sun, Yan (Tricia), Forced Remediation: The Use of Corporate Monitors in Sanctions for Misconduct (May 2, 2022). Available at SSRN: https://ssrn.com/abstract=4067889 or http://dx.doi.org/10.2139/ssrn.4067889

Rebecca Files (Contact Author)

University of Texas at Dallas ( email )

800 West Campbell Road, SM 41
Richardson, TX 75080-3021
United States
9728835818 (Phone)

Gerald S. Martin

American University - Kogod School of Business ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-3914 (Phone)

Yan (Tricia) Sun

Central Michigan University - School of Accounting ( email )

Mt. Pleasant, MI
United States

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