Does industry employment of active regulators compromise oversight?

Category: Accounting Research Seminar
When: 12 November 2020
, 14:15
 - 15:15
Where: Zoom-URL


I study whether industry employment of active regulators compromises oversight. To examine this question, I exploit that the Financial Reporting Enforcement Panel (FREP), the German capital-market regulator responsible for enforcing public firms’ compliance with accounting standards, allows its senior regulators to serve on boards of public firms during their FREP tenure. I find that firms are less likely to face enforcement actions after they appoint regulators to their board. After such an appointment, firms are also less likely to receive an unqualified audit opinion, more likely to have an above normal risk of accounting manipulation as measured by an F-Score greater than 1, and exhibit higher abnormal accruals. These effects are most pronounced after appointing FREP’s Head of Enforcement and in years with performance pressure. These findings, robust to identification concerns, show that industry employment of active regulators can result in conflicts of interest that facilitate regulatory capture.