Abstract

We investigate the enforcement record of the SEC against auditors over the years 1996–2009 to evaluate concerns about the alleged lax enforcement effort of the SEC against auditors. Of the 435 enforcement actions initiated by the SEC against companies for fraudulent financial reporting, the auditor who signed off on the underlying financial statements during the violation period is specifically named as a defendant by the SEC in 78 cases. Conditioned on being charged by the SEC, a Big N auditor is less likely to be named in an AAER relative to a non-Big N auditor, after controlling for the egregiousness of the reporting fraud and the characteristics of firms that self-select to buy audits from non-Big N firms. A closer look at the specific sanctions (individual partner or firm charged, administrative or court action, penalties imposed) suggests that the SEC typically goes easy on auditors, especially the Big N, relative to fraudulent firms or its managers. Private enforcement is more effective as class action lawsuits against auditors are relatively more frequent. However, SEC actions against auditors are not associated with a loss of market share for such auditors, except in extreme circumstances. These findings have implications for the debate about regulatory and enforcement changes designed to make auditors more accountable and independent gatekeepers.

Citation

Kedia, Simi, Urooj Khan, and Shivaram Rajgopal. "The SEC's Enforcement Record Against Auditors." Columbia Business School, 2014.

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