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Corporate General Counsel and Financial Reporting Quality

Author

Listed:
  • Justin J. Hopkins

    (Darden Graduate Business School, University of Virginia, Charlottesville, Virginia 22903)

  • Edward L. Maydew

    (Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599)

  • Mohan Venkatachalam

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Abstract

We examine the role of general counsel (GC) in firms' financial reporting quality. GCs have a broad oversight role within the firm, including keeping the firm in compliance with laws and regulations and dealing with potential violations with respect to financial reporting. Several high-profile U.S. Securities and Exchange Commission (SEC) investigations have resulted in lawsuits or indictments against GCs for perpetrating financial fraud and caused many to ask: where were the gatekeepers? As such, we examine the conditions under which GCs may stray from their primary role as gatekeepers. Mainly, we empirically investigate claims that compensation can impair the independence or compromise the professional judgment of a GC. We measure the level of compensation using the GC’s presence or absence in the top five officers of the firm by compensation. Results are consistent with GCs straying from their role as gatekeepers, to some extent, when highly compensated in a manner similar to the CEO and CFO. In particular, firms with highly compensated GCs have lower financial reporting quality and more aggressive accounting practices, including management of the litigation reserve. However, the results also show that highly compensated GCs play an important gatekeeping role in keeping the firm in compliance with generally accepted accounting principles. Thus, highly compensated GCs appear to tolerate moderately aggressive behavior but constrain it such that it would not result in violation of securities laws and jeopardize their standing within the firm. This paper was accepted by Mary Barth, accounting.

Suggested Citation

  • Justin J. Hopkins & Edward L. Maydew & Mohan Venkatachalam, 2015. "Corporate General Counsel and Financial Reporting Quality," Management Science, INFORMS, vol. 61(1), pages 129-145, January.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:1:p:129-145
    DOI: 10.1287/mnsc.2014.2072
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    5. Dan Amiram & Zahn Bozanic & James D. Cox & Quentin Dupont & Jonathan M. Karpoff & Richard Sloan, 2018. "Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature," Review of Accounting Studies, Springer, vol. 23(2), pages 732-783, June.
    6. Adrienne Rhodes & Dan Russomanno, 2021. "Executive Accountants and the Reliability of Financial Reporting," Management Science, INFORMS, vol. 67(7), pages 4475-4504, July.
    7. Florackis, Chris & Sainani, Sushil, 2021. "Can CFOs resist undue pressure from CEOs to manage earnings?," Journal of Corporate Finance, Elsevier, vol. 67(C).
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    9. Galeotti, Marcello & Rabitti, Giovanni & Vannucci, Emanuele, 2020. "An evolutionary approach to fraud management," European Journal of Operational Research, Elsevier, vol. 284(3), pages 1167-1177.
    10. Adair Morse & Wei Wang & Serena Wu, 2016. "Executive Lawyers: Gatekeepers or Strategic Officers?," NBER Working Papers 22597, National Bureau of Economic Research, Inc.
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    15. Boone, Jeff & Hao, Jie & Linthicum, Cheryl & Pham, Viet, 2024. "Impression management strategy — The relationship between accounting narrative thematic bias and financial graph distortion," The British Accounting Review, Elsevier, vol. 56(4).
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