Two essays on the foreign corrupt practices act: Empirical analyses of auditor risk assessment and subsequent internal governance changes

There is currently a rapid increase in enforcement activity for violations of the Foreign Corrupt Practices Act of 1977. Extant research also shows that both the direct and indirect costs to the implicated firms have skyrocketed. However, there is still considerable debate over the application of the enforcement program. Critics argue that the recent increases in enforcement activity is a result of over-regulation. This study contributes to the current debate by examining whether auditors, another vital actor in capital market efficiency, evaluate FCPA violators to be risker firms than their peers. I examine audit fees and audit report lags pre- and post-enforcement action. This includes an analysis of auditor turnover and audit fee changes. Furthermore, there is little information on the efficacy of FCPA enforcement in improving corporate governance. In essay two, I investigate whether firms that violate the FCPA subsequently implement internal governance changes. I conduct a difference-in-differences analysis to compare the pre- and post-governance characteristics for FCPA violators versus a propensity score-matched control sample. The results refute the over-regulation notion by showing that auditors also evaluate FCPA riskier. The enforcement activity appears effective in improving corporate governance.