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The Impact of SEC Comment Letter Releases

Author : Bret A. Johnson

Publisher :

Page : 75 pages

File Size : 10,50 MB

Release : 2015

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Book Description

In June 2004, the SEC made a policy decision to publicly release comment letter correspondence following its filing reviews. Comment letter correspondence represents a dialogue between the SEC staff and public companies' managers regarding their disclosure decisions. The release of comment letter correspondence could provide investors with greater context and detail underlying firms' financial reports. Leading up to the policy, there was an increase in the number of Freedom of Information Act ("FOIA") requests for comment letter correspondence, which suggests that it was perceived to have informational value. However, there is limited empirical evidence on whether investors respond to its release. I specifically examine whether comment letter releases (1) provide investors with incremental information beyond companies' existing financial reports and (2) influence information asymmetry among investors. I do not find strong evidence of investor responses absent a concurrent filing, and I find mixed evidence on whether information asymmetry increases immediately following comment letter releases. Further, the increases in information asymmetry are exacerbated for releases with a high level of comment letter attention by sophisticated investors. Overall, these results suggest that comment letter releases are not informative to investors in the absence of a concurrent or future information release and that information asymmetry is mitigated by non-sophisticated investor attention to the releases.



The Impact of SEC Comment Letters and Short Selling on the Demand for Audit Quality

Author : Justyna Skomra

Publisher :

Page : 250 pages

File Size : 48,15 MB

Release : 2018

Category : Auditing

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Book Description

The Sarbanes-Oxley Act of 2002 (Section 408) requires the Securities and Exchange Commission (SEC) to conduct periodic reviews of financial statements and related disclosures for publicly traded firms. The reviews are documented in the form of comment letters issued to a company's management for failure to prepare financial statements in accordance with generally accepted accounting principles (GAAP). Short interest traders are considered to be the most sophisticated group of investors providing additional monitoring of firms in the market. In this dissertation, I examine the impact of SEC comment letters and short selling positions on the demand for audit quality by management of client firms. Prior studies have shown that comment letters provide a significant signal to SEC registrant companies and their auditors about noncompliance with GAAP and other SEC regulations. As auditors play a critical role in the filing process of a company, they also contribute to the receipt of comment letters by their clients. Additionally, they play a critical role in bridging the information gap between investors and the firm. I examine the impact of two types of monitoring mechanisms, regulatory and market-based, on the subsequent demand for audit quality by management of client firms. More specifically, I examine whether the release of the comment letter combined with short selling activity (1) influences auditor's efforts reflected in increased audit fees, (2) leads to subsequent auditor resignation/dismissal due to inability to provide demanded high quality audits, (3) triggers downward changes in discretionary accrual, (4) decreases likelihood of restatements, (5) leads to issuance of material weaknesses opinion, and lastly (6) decreases the likelihood of the PCAOB (Public Company Accounting Oversight Board) inspection deficiencies. Based on the sample of unique comment letters from years 2005 through 2015 and the information on the short interest positions, I find varying level of support for the tested hypothesis. Overall, the results are generally consistent across the proxies used to measure audit quality. Hence, they indicate that both monitoring mechanisms have an impact on the demand for higher quality audits. These findings are robust to controls for client and auditor characteristics.



The Effect of Enforcement Transparency

Author : Miguel Duro

Publisher :

Page : 61 pages

File Size : 31,7 MB

Release : 2019

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Book Description

This paper studies the effect of the public disclosure of the Securities and Exchange Commission (SEC) comment-letter reviews (CLs) on firms' financial reporting. We exploit a major change in the SEC's disclosure policy: in 2004, the SEC decided to make its CLs publicly available. Using a novel dataset of CLs, we analyze the capital-market responses to firms' quarterly earnings releases following CLs conducted before and after the policy change. We find that these responses increase significantly after the policy change. These stronger responses partly occur while the review is still ongoing and persist on average for two years. Corroborating these results, we also document a set of changes that firms make to their accounting reports following CLs. Our results indicate that disclosure of regulatory oversight activities can strengthen public enforcement.



SEC Comment Letter Disclosures and Short Sellers' Front-Running

Author : Sam (Sunghan) Lee

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Page : 0 pages

File Size : 18,23 MB

Release : 2022

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Book Description

Prior studies show that comment letters released by the Securities and Exchange Commission provide information on firms' financial reporting quality and can have adverse value implications about the firms. We examine whether short sellers front-run comment letter disclosures and take short positions based on the economic implications of the letters. We find that short interest increases before comment letter disclosures and that the increase is positively associated with the severity of the letters. We also find evidence suggesting that short sellers obtain private information through social connections with corporate insiders. Finally, we document a negative but delayed market reaction to the disclosure of severe comment letters. These results suggest that front-running the comment letter disclosure is not the optimal trading strategy for short sellers. Short sellers can gain similar profits, and bear less risk, if they put off increasing their short positions until after the disclosure.



Model Rules of Professional Conduct

Author : American Bar Association. House of Delegates

Publisher : American Bar Association

Page : 216 pages

File Size : 40,83 MB

Release : 2007

Category : Law

ISBN : 9781590318737

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Book Description

The Model Rules of Professional Conduct provides an up-to-date resource for information on legal ethics. Federal, state and local courts in all jurisdictions look to the Rules for guidance in solving lawyer malpractice cases, disciplinary actions, disqualification issues, sanctions questions and much more. In this volume, black-letter Rules of Professional Conduct are followed by numbered Comments that explain each Rule's purpose and provide suggestions for its practical application. The Rules will help you identify proper conduct in a variety of given situations, review those instances where discretionary action is possible, and define the nature of the relationship between you and your clients, colleagues and the courts.



SEC Comment Letters and Insider Sales

Author : Patricia Dechow

Publisher :

Page : 67 pages

File Size : 48,67 MB

Release : 2016

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Book Description

We document that insider trading is significantly higher than normal levels prior to the public disclosure of SEC comment letters relating to revenue recognition. Furthermore, insider trading is triple its normal level for firms with high short positions. We find a small negative return at the comment letter release date and a negative drift in returns of one to five percent over the next 50 days following the release. We also find that greater pre-disclosure sales are associated with a stronger negative drift. This evidence suggests that insiders appear to benefit from trading prior to revenue recognition comment letters. We investigate whether the delayed price reaction to comment letter releases is due to investor inattention. Consistent with this explanation, we document that comment letters are downloaded infrequently from EDGAR in the days following their public disclosure.



Embedded Derivatives

Author : International Accounting Standards Board

Publisher :

Page : 18 pages

File Size : 26,96 MB

Release : 2009

Category : Assets (Accounting)

ISBN :

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The Effect of Sec Tax Comment Letters on Institutional Investors' Information Acquisition Activities and Corporate Disclosure

Author : Yang Cheng

Publisher :

Page : 116 pages

File Size : 28,56 MB

Release : 2020

Category : Institutional investors

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Book Description

This study examines the effect of SEC tax comment letters on institutional investors' information acquisition activities and consequential tax disclosures. These two research questions are related to the SEC's mission to protect investors, which is the primary objective of the SEC's comment letter public release policy. Regarding the first research question, I find that institutional investors' information acquisition activities for tax-related comment letter conversations, which include recipient firms' responses, are greater than those for non-tax related conversations. Moreover, institutional investors are more likely to obtain comment-letter conversations for recipient firms that have appeared to be tax aggressive in both current and previous years. Institutional investors are more likely to obtain comment-letter conversations if the SEC comment letters include more uncertain tax topics. Regarding the second research question, I find a significant increase in the number of words in both tax footnotes and paragraphs but with slightly reduced readability, suggesting that managers modify the consequential tax disclosures with their own purposes.This research achieves several aims. First, the findings of this study contribute to the understanding of the consequences of receiving comment letters and their resolution. Second, this study contributes to the literature investigating investors' acquisition of tax-related information. This paper also contributes to tax information disclosure literature as well as to the literature on textual analysis in accounting and finance. The findings of this study will have implications for regulators, investors, and corporate managers.



Comment on SEC Release No. 33-9929, Effectiveness of Financial Disclosures About Entities Other Than the Registrant

Author : J. Robert Brown

Publisher :

Page : 10 pages

File Size : 40,67 MB

Release : 2016

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This letter comments on the SEC's proposals to improve disclosure effectiveness by altering the requirements of Regulation S-X. In particular, the letter asserts that the practice of requiring the use of pro forma financial statements under Rule 3-05 should be altered in a manner that makes the financials more effective. This could be done by allowing management to make greater use of assumptions and estimates in developing the pro forma financial statements, thereby providing shareholders with an analysis of the acquisition as seen “through the eyes of management.”



Is the Character of SEC Comment Letters Relevant to Recipients?

Author : Jordan Rippy

Publisher :

Page : 206 pages

File Size : 26,26 MB

Release : 2017

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Book Description

Prior research has provided mixed results regarding changes in firm behavior in response to comment letters from the Securities and Exchange Commission (SEC) (Johnston and Petacchi 2016; Kubick, Mayberry, Omer, and Lynch 2016; Robinson, Xue, and Yu 2011; Wang 2016). This study documents that comment letters come in two main categories: accounting-focused letters and disclosure-focused letters. I examine whether the character of comment letters (accounting versus disclosure) impacts a firm's response to comment letters questioning the allowance for doubtful accounts (AFDA). I find that firms with abnormal accruals in the AFDA are more likely to receive an accounting-focused comment letter and these firms are also more likely to constrain AFDA-related earnings management behaviors in the period after comment letter resolution. Disclosure-focused comment letters exhibit no such patterns. The results of this study suggest (1) the lack of consistent findings in prior research may be partially attributable to homogenously classifying dissimilar comment letters and (2) the SEC filing review and comment letter process may be an effective tool in monitoring and constraining earnings management behaviors.