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The impact of mandatory disclosure on SEC financial statement review outcomes
Preprint   Open access

The impact of mandatory disclosure on SEC financial statement review outcomes

Cristi A. Gleason and Martin Thomsen
SSRN Electronic Journal
2023
DOI: 10.2139/ssrn.4626209
url
https://doi.org/10.2139/ssrn.4626209View
Preprint (Author's original)This preprint has not been evaluated by subject experts through peer review. Preprints may undergo extensive changes and/or become peer-reviewed journal articles. Open Access

Abstract

We examine whether changes in mandatory financial statement disclosure are associated with changes in the likelihood firms receive tax-related comments from the SEC. The SEC is charged with reviewing financial filings to monitor and improve financial reporting quality. Regulators, investors and researchers question the effectiveness of SEC reviews. SEC reviews are dependent on disclosures because SEC reviewers in the initial review do not have access to underlying accounting records used by external auditors. We focus on two changes in 2007, one that increased required disclosure and one that decreased required disclosure. We find that the increase in tax disclosures for US GAAP filers following FIN 48 is associated with an increased likelihood of receiving a tax-related SEC comment letter. Whereas the decrease in required disclosure for foreign filers following the elimination of the reconciliation requirement is associated with a lower likelihood of receiving tax-related comments. SEC reviews are also less likely to target tax avoidance when disclosure is lower. Our study underscores that mandatory disclosure policies enhance the efficacy of the SEC’s oversight. Our evidence that mandatory disclosure facilitates SEC reviews also highlights a potential cost of permitting foreign filers to provide fewer disclosures to U.S. investors than U.S. firms are required to provide.

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