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  • Management Science

Does Industry Employment of Active Regulators Weaken Oversight?

By: Jonas Heese
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Abstract

I study whether industry employment of active regulators weakens 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 active regulators to their board. After such an appointment, firms are more likely to receive a qualified 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 income-increasing abnormal accruals. These findings suggest that directorships of active regulators can result in conflicts of interest that weaken oversight.

Keywords

Conflict-of-interest Policies; Directorships; Enforcement Actions; Industry Employment; Self-regulatory Organizations; Governance Compliance; Governing and Advisory Boards; Policy; Conflict of Interests

Citation

Heese, Jonas. "Does Industry Employment of Active Regulators Weaken Oversight?" Management Science (forthcoming).
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About The Author

Jonas Heese

Accounting and Management
→More Publications

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  • Conflicts of Interest at Bell Bank By: Jonas Heese
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