Introduction
The study looks at Securities and Exchange Commission (SEC) with the aim of determining the conditions in which leniency is exercised. It looks at whether making disclosures openly and within good time leads to a favorable consideration in the case of disciplinary measures. It concludes that while forthright disclosures increases sanctions since it enables the SEC to profile an organization, this is mitigated through lenient penalties(Files, 2012). The paper examines leniency by the SEC and assess the impact of self-reporting and the rewards by the SEC on leniency.
Background
Many organizations offer some incentive for self-reported misconduct, for example, the Environmental Protection Agency and the US Department of Justice. Many studies have assessed the role of self-reporting and leniency in organizations’ accountability. However, the SEC’s relationship with cooperates on forthright disclosures and the leniency benefit has not been assessed before. SEC is free to choose who to sanction and who not to, this study looks at the firms likely to get sanctioned and those less like to be sanctioned. Using regression models, the study analyzes the influences on fines imposed; the ability for a company to pay, and the gravity of the crime committed. The study explores three areas:
Cooperation
Even though cooperation by organizations happens through different means, the study focuses on investigations and reporting initiated by the company since this is what the SEC considers in the application of leniency measures. The description of the restatement that is determining whether it is an error or an irregularity is also important when leniency is considered. On the other hand, self-initiated investigation can also increase penalties and chances of sanctions in cases where the investigation reveals considerable details that may be considered more damaging. The SEC encourages this self-reporting/ investigation to avoid huge government expenditures on investigations.
Timely disclosures
Timely disclosures are assessed in this study by examining the “timeliness of restatement disclosures (rather than management forecasts)” (Files, 2012, p. 5). The study observes that when checks and balances are placed by investors, the likelihood of timely reporting of restatements improves considerably. It states that the SEC values early reporting since it works to protect investors by supplying them with the real picture of the company to influence their decisions this makes timeliness a factor when leniency is being considered.
Complete and effective disclosures
It assesses the discretion used by managers in reporting the restatement. The SEC views this as important; when what is given prominence in the reporting of a restatement does not match the details, it influences the decision on sanctions and leniency on fines.
Conclusion
The SEC can often decide to be lenient by issuing lesser penalties instead of completely doing away with sanctions in dealing with forthright disclosures. The study concludes that when a company initiates its own investigations and report instances non-compliance, the SEC are more likely to sanction them, however, the penalties are likely to lighter than otherwise. The study therefore proves that the SEC rewards corporations for forthright disclosures but this reward is not n the form of reduced sanctions but is manifested in reduced severity of fines imposed. The findings also indicate that the decisions of the SEC on sanctions are also influenced by the publicity of the report on a restatement.
The study important since it informs stakeholder in organizations and their lawyers on the advantages and disadvantages of conducting self-assessment audits and reporting any cases of discrepancies
References
Files, R. (2012) SEC Enforcement: Does Forthright Disclosure and Cooperation Really Matter?. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.1640064
