Unraveling Financial Fraud : The Role of the Board of Directors and External Advisors in Conducting Independent Internal Investigations

Although firms are encouraged by the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) to conduct internal investigations following financial misconduct, prior research finds few benefits for investigating firms. This study examines a novel aspect of internal investigations, namely whether the investigation is conducted by independent leaders or external advisors, and explores the impact of these participants on investigation outcomes. We find that firms whose internal investigations are led by independent teams are more likely to retain external advisors, have a higher likelihood of chief executive officer (CEO) turnover, and face a lower likelihood of an SEC enforcement action than do firms whose investigations are led by non-independent teams. Our findings demonstrate that the SEC grants enforcement leniency to cooperative firms. These results also suggest that appointing independent groups to lead internal investigations protects the firm, at the expense of the CEO, following accounting fraud