Question

Discuss what would be found in the SEC “accounting and auditing enforcement releases (AAERs)

Answer 1

The SEC issues Accounting and Auditing Enforcement Releases (AAERs) when a company commits a violation, including intentional falsification of financial statements, over-statement of assets and income and inadequate disclosure. In approximately one-third of the cases, the SEC also takes enforcement actions against the auditor. We investigate whether audit firm characteristics or type of financial reporting violations are related to enforcement actions against the auditor. Audit firm size, membership in the AICPA's Division for CPA Firms, and the existence of disclosure violations are statistically significant in a logistic regression model. This finding extends prior research that auditor reputation has “brand name” value. Institutional theory provides a perspective of this finding as the SEC and brand name auditors seek social legitimacy, which has public policy implications.