The SEC’s Enforcement Record against Auditors

Abstract

We investigate the effectiveness of regulatory oversight exercised by the SEC against auditors over the years 1996-2009. The evidence suggests that the SEC is significantly less likely to name a Big N auditor as a defendant, after controlling for both the severity of the violation and for the characteristics of companies more likely to be audited by Big N auditors. Further, when the SEC does charge Big N auditors, the SEC (i) is less likely to impose harsher penalties on the Big N; and (ii) is less likely to name a Big N audit firm relative to individual Big N partners. Moreover, the SEC relies overwhelmingly on administrative proceedings, instead of the tougher civil proceedings, against auditors. One interpretation of these patterns is that the SEC’s enforcement against auditors is relatively mild. Other interpretations of these results are also discussed. Though private litigation against auditors is associated with a loss of market share for the auditor, there is no evidence of such product market penalty subsequent to SEC action. We thank our respective schools and the Goizueta Business School for financial support. We are thankful to Chang Wook Lee and Haitao Tu for excellent research assistance. We would like to thank Jonathan Karpoff, Scott Lee and Gerald Martin for graciously sharing their SEC enforcement data. Cornerstone Research and Stanford Law School provided the data on securities class actions. We acknowledge helpful comments from participants at the 2014 CELS conference, the 2014 University of Illinois audit symposium, Zoe-vanna Palmrose and Jill Fisch (discussants), Jieying Zhang, Monika Causholli, Kathryn Kadous, Stephen Penman and workshop participants at the University of Mississippi, University of Texas at Dallas and Columbia Business School Brown Bag. The views expressed in this paper are ours and do not represent in any way the views of Cornerstone Research or Stanford Law School. Also, all errors are ours.