SEC Division of Corporation Finance Monitoring and CEO Power

SEC Division of Corporation Finance Monitoring and CEO Power


Security and Exchange Commission (SEC) registrants’ filings are reviewed every three years. This study aims to research the SEC monitoring duties and the division of SEC Enforcement. This paper covers the Division of Corporation Finance (DCF) to infer SEC’s oversight roles as well the conflicts between Chief Executive Officers (CEOs) and Board of Directors of a firm.


CEOs have a lot of power vested in them. Therefore, the first argument is that companies with restatements instigated by the DCF have CEOs in the period preceding the prompting of the restatement compared to when other monitors such as external auditors or board of directors. The CEOs have influence over them making their monitoring poor.

The board of directors’ influence over CEOs draws out the second line of thinking. This argument is that companies with restatements instigated by the Division of Corporation Finance are more likely to terminate powerful CEOs than when prompted by other monitors.


The sample for the study is obtained from an eight-year period of reinstatements from 2000 to 2007. The total population was 1357 firms with 10-K or 10-Q amendments. Of these, 980 were used to test CEO power. Lastly, 825 observations were used to test the second hypothesis on the CEO power change.


Cheng et al. (2013) apply a narrative approach to study previous theories pertaining finance, accounting, and management. The sample used involves restatements of over eight years. The author uses a descriptive quantitative strategy to analyze the restatement samples studied.

The author uses Pearson Correlations to show the effects of restatements prompted by DCF with regards to those prompted by other monitors. He also uses logistic regression analysis to test on the CEO turnover.


More firms have CEOs who also chair the board of directors. These firms receive more DCF-prompted restatements as compared to others. The CEOs influence the appointment of directors meaning that they have more power over the board. These firms have weak audit controls signified by few board meetings, and less audits.

The research also finds out that after discovering a misstatement and a restatement is given, there is an increase in CEO turnover. After a restatement, the boards of directors hold CEOs responsible and terminate their working in the firms.


The power vested on the CEO influences the company governance. Such companies experience tussles between the board of directors and their CEOs. The more the CEO exercises power over the board, causes the board to lack effectiveness and thus the company experiences weak controls. Such domination by CEOs necessitates restatements from DCF. The board will re-evaluate the company governance structure; they act to the DCF restatement by holding powerful CEO’s accountable hence ousting him from his job.


This research aims to add to the accounting standards by pointing out the effects of CEO’s power to the corporate governance. It addresses that the higher the power vested to a CEO, the weaker the audit and accounting controls of a company are due to the weak board of directors. The study also helps in understanding how this leads to conflicts between CEOs and the board.

The high powers of CEOs lead to misstatements; this will explain why DCF target these companies. The restatements from DCF will prompt the board to re-evaluate the governance structure.


CEOs have the responsibility to manage organizations while they are the apex of a company. When CEOs have excess powers, they tend to make decisions favorable to them. Directors of a company are supposed to be watchdogs of the operations to ensure the smooth running of a company. Powerful CEOs appoint directors to the board making them weak and submissive to the CEO. Such submission by board directors compromises their duty and allows the CEO to run the company poorly. The Division of Corporation Finance deals with monitoring of the company’s performance upon reviewing and noticing a misstatement. The body sends a restatement to a company that makes CEOs accountable to the board and hence increased CEO turnover.


This research is of great significance to every organization. CEOs have had a bigger influence on the selection of directors who tend to perform according to their stipulations. Such CEO’s influence weakens their oversight duties leading to poor management of a company.




Cheng, X., Gao, L., Lawrence, J. E., & Smith, D. B. (2013). SEC division of corporation finance monitoring and CEO power. AUDITING: A Journal of Practice & Theory33(1), 29-56.

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