Sec Sanctions

Internal Financial Impacts of the SEC's Accounting and Auditing Enforcement Releases

In fiscal 2011, the U.S. Securities and Exchange Commission (SEC) filed 735 enforcement actions, up 8% from 2010 and the highest since its formation in 1933 (Greene, 2011). This, along with the passage of the Sarbanes Oxley Act in 2002 and the Dodd Frank Act in 2010, has increased the necessity for additional research on the impacts of SEC sanctions.

This paper proposes to add to the volume of research on this subject by examining one aspect of the SEC's enforcement actions, the issuance of Accounting and Auditing Enforcement Releases (AAERs). Specifically, this study compares internal financial aspects of companies that have received AAERs to those that have not. Consequently, this research should be of interest to finance and legal studies academics, as well as practitioners in both areas.

The next section presents background information on AAERs. This is followed by a review of the relevant literature. The subsequent sections discuss the sample and methodology, and results of the empirical tests. The final section presents the study's conclusions, as well as suggestions for areas of future research.

BACKGROUND

AAERs are "financial reporting related enforcement actions concerning civil lawsuits and administrative proceedings," and are issued as parts of SEC investigations (SEC, 2011). AAERS identify the persons, corporations, or both that are being investigated for violations of SEC regulations, as well as information concerning the infringements, and the SEC's intended response (SEC, 2011).

The SEC initiates an investigation on its own, or upon receipt of a tip that there has been a violation or violations of security rules or regulations. A tip or referral can come from the public, a whistleblower, the FinCEN (Financial Crime Enforcement Network), the Public Company Accounting Oversight Board, State Securities Regulators, Congress, or self-regulatory agencies. Upon the receipt of a tip or referral, the SEC will ascertain whether the facts indicate possible violations of federal securities laws. If it determines that this is the case, it will open a "Matters Under Inquiry" (MUI). The MUI is open for sixty days and thereafter is converted into a formal investigation, or the matter is closed. If the SEC decides to proceed with an