Essay: Review of corporate misconduct articles

In Simi Kedia and Shiva Rajgopal’s article, “Do the SEC’s enforcement preferences affect corporate misconduct?” asks the question, “Does proximity and other limitations of the SEC affect the misconduct of corporate reporting?” Kedia nad Rajgopal investigate the SEC’s capability and influence on local firms as well as the restatement of firms outside its normal reach.
The researchers found that areas that are located near SEC offices present smaller misreporting occurrences. Whereas, those areas that are quite a distance away from the SEC (more than 100km away) are about 350 percent more likely to issue a restatement decreasing income as opposed to the areas that are located in close proximity to the SEC.
Investors, auditors, legislators, regulators, taxpayers are some of the stakeholders that would be mainly concerned about these finding. For example, investors would be concerned since they have some reliance on SEC regulation and to determine that some of the SEC’s power is limited in certain jurisdictions would have a negative impact on the market. Auditors would also find these findings disconcerting. It would add significant pressure to their audits and create a greater burden for these CPA firms since they would be more suspect to jurisdictions outside the SEC’s locality.
If I had the opportunity to ask Ms. Julie Erhardt, the Deputy Chief Accountant of the SEC, I would ask, “How does the SEC maintain an equal influence on firms outside its local reach.” Since she is in charge of risk management at the SEC, I believe she would have an answer.
If I were to visit the NY office of KPMG and had the opportunity to meet the firm’s global leadership partners, I would summarize Kedia and Raigopal’s article as, “While the SEC does a great job at regulating, it is limited in its reach and presents a potential problem that firms distantly located may not reflect their financial statements in the correct light.”
In Ed deHann, Simi Kedia, Kevin Koh, and Shivaram Rajgopal’s article, “The revolving door and the SEC’s enforcement outcomes: Initial evidence from civil litigation,” the paper asks, “Do revolving doors at the SEC compromise regulatory oversight of firms.”
The researchers’ preliminary tests indicate some validity in the human capital hypothesis. However, the data also suggests that the aggressiveness on revolvers are more intense resulting in greater damages. They also determined that there was no correlation between personal connections and enforcement outcomes. However, there was an indication that firms that employ past SEC lawyers do experience lower damages and criminal cases. In total, the researchers’ evidence indicated that the SEC’s efforts seem not to be compromised by the revolving door phenomenon, but defense firms that do employ past SEC lawyers are typically able to get more lenient rulings for their clientele. Investors, legislators, lawyers, and accountants (auditors) would be concerned about these findings. Maintaining independence, let alone an appearance of it, creates significant challenges and worries. Investors may be warry of the SEC, and the ethical standards in place for professional service providers is also at stake.
If I had the opportunity to ask Ms. Julie Erhardt, the Deputy Chief Accountant of the SEC, I would ask, “How does the SEC maintain an appearance of independence despite the revolving door at the SEC.” Since she is in charge of risk management at the SEC, I believe she would have an answer since this phenomenon would undermine the SEC and create a significant risk to the SEC.
If I were to visit the NY office of KPMG and had the opportunity to meet the firm’s global leadership partners, I would summarize deHann, Kedia, Koh, and Rajgopal’s article as, “The revolving door at the SEC has caused significant worries in the SEC’s oversight and enforcement.”
In Mark Defond and Clive Lennox’s article, “Do PCAOB Inspections Improve the Quality of Internal Control Audits?” possess the question, “Are PCAOB Inspections improving the quality of internal audits?”
The researchers found that as audit firms received greater scrutiny and adverse findings by the PCAOB, that they in turn gave more adverse opinions to its clientele. They also determined that the PCAOB inspectors are not as concerned with audit firms issuing more adverse opinions, but rather issuing appropriate adverse opinions. It was also discovered that audit firms with higher deficiency rates typically charged their clients more.
Public companies, investors, auditors, etc. Public companies would find these findings worrisome since the credibility of the audit may be at stake. Auditors would care about these findings since it may affect their potential career options after working as an auditor as well as the audit firm’s reputation. Investors would be concerned since it would demonstrate the weakness of some audits by certain audit firms.
1. If you could go back in time after reading this paper, what question(s) would you want to ask speakers from our Washington DC trip. State the speaker(s) and question(s).PCAOB or AICPA
If I were to visit the NY office of KPMG and had the opportunity to meet the firm’s global leadership partners, I would summarize Defond and Lennox’s article as, “As the PCAOB’s inspections uncover greater deficiencies in audit firms, these firms typically increase the adverse opinions issued to their clients.”
 
In John Jiang, John Robinson, and Maobin Wang’s article, “Sleeping with the enemy: Taxes and former IRS employees,” begs the question, “How hiring former IRS employees can result in corporate tax benefits or costs as well as the rate which corporations hire these individuals.”
The researchers determined that while there was no visible reduction in the cash tax rates, it was found that corporations that hired former IRS employees experienced lower tax rate volatility and lower fees than those offered from tax services. Their findings also suggest that corporations do not necessarily hire former employees of the IRS to avoid tax but rather to control their current tax problems.
Corporations, regulatory bodies (IRS), the government, the general public, investors, current, prospective, and past IRS employees would find these findings interesting. For example, the general public may typically view the revolving door phenomenon as a way for corporations to curb the current tax system, when in reality it benefits investors by smoothing out the tax consequences. If I had the opportunity to ask Mr. Wajda, ____________ of the IRS, as well as __________ of the SEC, I would ask them how they viewed the revolving door at the IRS as well as the SEC. Is there certain knowledge that is potentially secret at these regulatory bodies tha former employees can exploit? How are these regulatory bodies maintaining their credibility despite this revolving door?
If I were to visit the NY office of KPMG and had the opportunity to meet the firm’s global leadership partners, I would summarize Jiang, Robinson, and Wang’s article as, “While the revolving door phenomenon of the IRS may seem as a way for corporations to do tax avoidance, in reality it most likely helps smooth tax consequences and help corporations align with current IRS rules.
In Christine Cuny, Jungbae Kim, and Mihir Mehta’s article, “Friends in high places: An examination of politically connected governments,” asks the question, “ Is there a negative correlation with political relationships and the municipalities’ current care of public funds in relation to the influence that local municipalities have in the federal legislature.”
The researchers determined that local governments, that were affected by an exogenous congressional departure, initially saw a drop in federal disbursements and ultimately then after enhanced their care over the public funds. Ultimately, their results indicated that significant influence in the political area ultimately deteriorates the municipalities motivations to perform in a fiscally efficient way. The general public, current officials, local municipalities, businesses, industries, and taxpayers would be concerned about these findings.
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In Mihir Mehta and Wanli Zhao’s article, “Politician Careers and Corporate Financial Misconduct,” the researchers as the question, “In the case of corporate financial misconduct, how do political figures, particularly those closely tied to the SEC, act and how are they affected when their constituents are involved in SEC investigations?”
The researchers determined that there was in fact some evidence that suggested that firms that are associated with SEC participating politicians receive less prosecution from the SEC as opposed to other firms. It was also found that if the SEC did pursue actions against a related firm to a politician, that the proclamations of the SEC to pursue such firms occurred after election periods. Therefore, these findings indicate that politicians act in self-preservation and influence the SEC’s enforcement.
Voters, regulatory bodies, investors, and other politicians and legislators should be concerned about these findings. These findings indicate some level of corruption within the government and does not allow proper disclosure of events, affecting the above parties.
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In Mihir Mhta, David Reeb, and Wanli Zhao’s article “Shadow Trading” they investigate the question, “Do insiders of a company try to use their privelaged information despite current regulations against the actions of insider training?”
There is an indication that prior to the announcement and issue of previously proprietary information, there are some indications of knowledgeable trading actions. Researchers also determined that there was a lower count of “shadow trading” when firms implemented explicit prohibitions.
Investors, legislators, federal investigators, and regulators (SEC), are key groups that may be concerned with such findings. In order to ensure and establish equal and fair markets, these groups must fully comprehend and utilize the findings listed in this article.