We use information extracted from a major proxy advisory service to test predictions from institutional theory regarding when and why audit committee ( AC ) members experience turnover because of evidence of ineffective governance. First, we broadly categorize AC ineffectiveness concerns as either (i) financial reporting failures or (ii) characteristics of individual AC members. Institutional theory suggests that the visible nature of the first category is more likely to threaten perceptions of AC legitimacy and hence prompt turnover, which is what we find. We then enrich the analysis by interacting the AC ‐member ineffectiveness indicators with the extent of shareholder protest votes, finding that shareholder dissent elevates the turnover effects of both categories of ineffectiveness, as institutional theory would predict. Finally, we find that otherwise effective AC members face an increased likelihood of turnover if they serve on the AC when financial reporting failures are discovered, even if they were not on the AC when the events precipitating the failures occurred. Overall, our findings support the institutional theoretic premise that boards take remedial actions when necessary to restore perceived legitimacy.

Motivated by evidence from the empirical accounting and finance literatures suggesting that short sellers target firms with suspect financial reporting, we investigate whether short interest provides a signal of the degree of audit risk. We find a positive association between audit fees and short interest (total shares sold short scaled by total shares outstanding) after controlling for other determinants of audit fees. This finding suggests that short interest is an indicator of audit risk that reflects information not captured by traditional client risk measures. We also find an increase in the magnitude of the association between audit fees and short interest after events in the early 2000s (corporate scandals, the collapse of Arthur Andersen, and the implementation of new auditing standards) which increased auditors’ responsibilities to deter fraud and made the implications of fraud particularly salient to external auditors. Our findings are important because they suggest that auditors’ sensitivity to client risk information increased post-2002, indicating that efforts by regulators and standard setters (e.g., the PCAOB and the AICPA) to increase auditors’ attention to risk have been successful.

Regulators claim to reward firm cooperation in the enforcement process. However, critics question which actions constitute firm cooperation and contend that cooperation leads to “harsh” and “unfair” outcomes. Examining 1,162 enforcement actions for financial misrepresentation initiated by the Securities and Exchange Commission and Department of Justice, we find that regulator-cited cooperation credit is best explained by remedial actions and self-reported law violations. Cooperation credit is negatively associated with firm monetary penalties assessed by regulators. Our estimates suggest that firms with cooperation credit realize an average penalty reduction of $23.8 million (49 percent). We also estimate that average reputation-related losses are $756 million (70 percent) lower for firms with cooperation credit. We find no association between cooperation credit and related private action outcomes. Our results provide important insight into what constitutes meaningful cooperation with regulators, and suggest that the benefits can be substantial for firms deemed to be cooperative.