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Does Industry Employment of Active Regulators Weaken Oversight?

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  • Jonas Heese

    (Harvard Business School, Boston, Massachusetts 02163)

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 one, and exhibit higher income-increasing abnormal accruals. These findings suggest that directorships of active regulators can result in conflicts of interest that weaken oversight.

Suggested Citation

  • Jonas Heese, 2022. "Does Industry Employment of Active Regulators Weaken Oversight?," Management Science, INFORMS, vol. 68(12), pages 9198-9218, December.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:12:p:9198-9218
    DOI: 10.1287/mnsc.2022.4326
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