Regular Article
THE SEC'S ENFORCEMENT ACTIONS AGAINST AUDITORS: AN AUDITOR REPUTATION AND INSTITUTIONAL THEORY PERSPECTIVE

https://doi.org/10.1006/cpac.1996.0106Get rights and content

Abstract

The purpose of this study is to gain insight into the importance of auditor reputation by looking at the evidence provided by SEC enforcement actions against companies and their auditors. 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.

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Address for correspondence: Professor W. Bremser, Villanova University, Dept of Accountancy, College of Commerce and Finance, 316 Bartley Hall, Villanova PA 19085 1678, U.S.A.

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