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  • Jennifer M Mueller-Phillips
    SEC Division of Corporation Finance Monitoring and CEO...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.07 Impact of SEC Actions, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements, 12.04 Investigations in Auditing Section Research Summaries Space public
    SEC Division of Corporation Finance Monitoring and CEO Power.
    Practical Implications:

    This research is important for several reasons. First, the authors provide insight into how a monitoring mechanism, such as the staff of the DCF, adds to the oversight of the financial reporting process. The findings illuminate the importance of understanding the conflict between boards and CEOs by suggesting that a strong CEO's influence over a board may adversely affect the effectiveness of board oversight. The authors provide evidence that the DCF may target companies with strong CEOs and weak board monitoring for more intensive review. Second, the results imply that the discovery of the need to restate is different for DCF-instigated restatements. DCF-prompted restatements lead companies to re-evaluate their governance structure.


    Cheng, X., L. Gao, J. E. Lawrence, and D. B. Smith. 2014. SEC Division of Corporation Finance Monitoring and CEO Power. Auditing: A Journal of Practice & Theory 33 (1): 29-56.

    CEO, DCF, governance, monitoring, investigations, restatements
    Purpose of the Study:

    Section 408 requires the Securities and Exchange Commission (SEC) to review the filings of all SEC registrants every three years. The SEC Division of Corporation Finance (and not the Division of Enforcement) is the part of the SEC charged with carrying most of the burden of the Section 408 monitoring. This study investigates this SEC monitoring role and differs from past SEC research by focusing on the SEC Division of Corporation Finance (DCF) rather than the Division of Enforcement and specifically on DCF's "review and comment" monitoring role.

    The authors argue that the DCF appears to realize powerful CEOs have more opportunity to deceive due to their greater board control and, therefore, they are viewed as experiencing less monitoring by other sources. In other words, the DCF appears to be naturally drawn to the firms where strong CEOs dominate the financial reporting process and firm-level monitoring by auditors and boards may be relatively lax.

    Design/Method/ Approach:

    The sample of 980 observations includes restatements from 2000 through 2007 obtained from GAO reports and Audit Analytics. The authors restrict the companies to those found in a Russell index. 209 observations were DCF prompted and 771 observations were other monitor prompted. Of the 980 observations, 825 were used in the analysis of the changes in CEO power as a response to restatement.

    • The authors find evidence that a powerful CEO may be able to bargain for less board scrutiny through fewer board meetings.
    • In the year prior to the discovery of the need to restate, firms with restatements prompted by the DCF have stronger CEO power and exhibit some evidence of weaker board monitoring.
    • Compared to firms with restatements prompted by other monitors, firms with restatements prompted by the DCF tend to have strong CEOs in the period prior to the discovery of restatements.
    • The authors find that companies with restatements prompted by DCF (versus other monitors) are more likely to terminate strong CEOs following the discovery of restatements.
    Accountants' Reporting, Standard Setting
    Impact of SEC Actions, Investigations, Restatements