Corporate Governance and Financial Authority Sanctions

The objective of this paper is to examine the joint effect of the board of directors and the auditor on the severity of sanctions imposed by the financial authority. Based on a theoretical model and using a unique dataset, we find that the board of directors and its audit committee play a crucial role when a firm faces financial authority sanctions: the board has a negative effect on the severity financial authority sanctions, while an auditor's effort has no significant impact. In particular, results show that the presence of independent and financial experts on both the board of directors and the audit committee can deter the severity of financial authority sanctions. However, our results suggest that firms that recently hired a Big 4 auditor see no significant impact.