Corporations under Probation: The Determinants and Consequences of the Monitorship Requirement in Regulatory Enforcement Actions





Journal Title

Journal ISSN

Volume Title



The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) require a set of firms to retain corporate monitors as a part of the pretrial settlement agreements in the enforcement process (hereafter the monitorship requirement). I examine the determinants of the monitorship requirement and its ensuing consequences in terms of firm monetary penalties and audit pricing. Using a dataset of enforcement actions for financial misrepresentation, I find that enforcement actions with bribery allegations under the Foreign Corrupt Practices Act (FCPA) and the number of violations charged against all respondents in an enforcement action are strong predictors of the monitorship requirement. In addition, announcing an internal investigation, the percentage of culpable executives terminated, and analyst following would reduce the likelihood of the monitorship requirement. Next, I investigate the substitutability between the monitorship requirement and firm monetary penalties as regulatory enforcement outcomes. I find no evidence that the monitorship requirement reduces firm monetary penalties. Rather, I find a positive association between the monitorship requirement and firm monetary penalties. I posit that the positive association exists because, after controlling for severity of the misconduct and other factors known to influence firm monetary penalties, the monitorship requirement proxies for the weak compliance program (or compliance culture) of a firm, which would increase monetary penalties assessed by the SEC and DOJ. Lastly, I examine whether and how the monitorship requirement influences audit pricing of enforcement firms. I find some evidence that auditors charge lower fees to enforcement firms with monitors compared to those without monitors. This result is consistent with auditors decreasing their assessed levels of audit effort and/or risk to a greater extent for enforcement firms with monitors, relative to those without.



Accounting fraud, Compliance auditing, Fines (Penalties), Corporations—Finance—Law and legislation, Corporations—Auditing—Law and legislation


Copyright ©2018 is held by the author. Digital access to this material is made possible by the Eugene McDermott Library. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.