Seeing is believing: Director accounting enforcement experience and financial reporting quality

Silver Chung and Daniel Sejun Hwang

Journal of Contemporary Accounting and Economics, 2025, vol. 21, issue 1

Abstract: This study investigates the impact of directors’ experiences with accounting enforcement on financial reporting quality (FRQ). While firms often regard real-life experiences as a crucial factor in their hiring decisions, the actual impact of directors’ experiences on corporate decisions, particularly financial reporting decisions remains unclear. Using a difference-in-differences method, we find significant changes in a firm’s FRQ when its director experiences SEC enforcement at another firm where she serves as a director. More specifically, we find that discretionary accruals and restatement likelihood decrease while real activities manipulation increases following a director’s Accounting and Auditing Enforcement Releases (AAER) experience. Additionally, such changes are concentrated among subsamples where AAERs allege fraud or GAAP violations, or the director serves on the audit committee at the perpetrating company. Collectively, these findings show that directors’ experiences make differences in related corporate decision-making and SEC enforcement actions have disciplinary effects beyond the firms that directly face charges.

Keywords: Financial reporting quality; Director experience; SEC enforcement; Accounting and Auditing Enforcement Releases (AAER) (search for similar items in EconPapers)
JEL-codes: G41 M40 M41 M42 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocaae:v:21:y:2025:i:1:s1815566924000535

DOI: 10.1016/j.jcae.2024.100453

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Journal of Contemporary Accounting and Economics is currently edited by Agnes C.S. Cheng, P. Clarkson, F.A. Gul, Zoltan Matolcsy, Dan Simunic and Ben Srinidhi

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