Corporate General Counsel and Financial Reporting Quality

Justin J. Hopkins (), Edward L. Maydew () and Mohan Venkatachalam ()
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Justin J. Hopkins: Darden Graduate Business School, University of Virginia, Charlottesville, Virginia 22903
Edward L. Maydew: Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599
Mohan Venkatachalam: Fuqua School of Business, Duke University, Durham, North Carolina 27708

Management Science, 2015, vol. 61, issue 1, 129-145

Abstract: We examine the role of general counsel (GC) in firms' financial reporting quality. GCs have a broad oversight role within the firm, including keeping the firm in compliance with laws and regulations and dealing with potential violations with respect to financial reporting. Several high-profile U.S. Securities and Exchange Commission (SEC) investigations have resulted in lawsuits or indictments against GCs for perpetrating financial fraud and caused many to ask: where were the gatekeepers? As such, we examine the conditions under which GCs may stray from their primary role as gatekeepers. Mainly, we empirically investigate claims that compensation can impair the independence or compromise the professional judgment of a GC. We measure the level of compensation using the GC’s presence or absence in the top five officers of the firm by compensation. Results are consistent with GCs straying from their role as gatekeepers, to some extent, when highly compensated in a manner similar to the CEO and CFO. In particular, firms with highly compensated GCs have lower financial reporting quality and more aggressive accounting practices, including management of the litigation reserve. However, the results also show that highly compensated GCs play an important gatekeeping role in keeping the firm in compliance with generally accepted accounting principles. Thus, highly compensated GCs appear to tolerate moderately aggressive behavior but constrain it such that it would not result in violation of securities laws and jeopardize their standing within the firm. This paper was accepted by Mary Barth, accounting.

Keywords: corporate counsel; financial reporting; accounting quality; earnings management; incentives (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:61:y:2015:i:1:p:129-145

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