Former Members of the U.S. Congress and Fraud Enforcement : Does it Help to Have Politically Connected Friends on the Board?

We investigate the relationship between the presence of former member of the U.S. Congress on corporate boards and fraud enforcement. We find that corporate fraud in companies with such members on the board stays undetected longer. When caught, such companies pay lower penalties. The appointment of former Congressional members to the board also lessens the probability of the company being subjected to Accounting and Auditing Enforcement Releases by the SEC after they face class-action lawsuits for fraudulent activities. Our results remain robust to the presence of other means of making political connections, such as lobbying, hiring revolving-door lobbyists, and contributing to political campaigns