Enforcement authority and financial reporting: Evidence from the SEC reorganization

초록

In 2007, the SEC eliminated the two-tier office hierarchy by elevating its six district offices to regional status, resulting in 11 regional offices that initiate over 75% of all investigations. Employing a difference-in-differences design, we first document that the SEC’s office reorganization is followed by increased staffing and investigations in the treated offices. Consistent with increased enforcement levels, we find that firms in the treated states exhibit lower absolute discretionary accruals and fewer restatements than those in the control states. This effect is more pronounced when the firms in the treated states are informed about increased enforcement, especially from nearby industry peers under SEC scrutiny or shared auditors with clients undergoing SEC investigations. Our findings remain robust to alternative reporting proxies and propensity score matching. Consistent with the SEC’s office reorganization enhancing financial reporting outcomes, investors react more positively to the reorganization announcement for firms with lower preexisting reporting quality.