Accounting Regulation Enforcement and Corporate Compliance Incentives

Abstract

This research investigates the underexplored relationship between the qualitative
dimensions of accounting regulation enforcement and the formation of corporate compliance incentives, moving beyond traditional economic deterrence models. While prior
literature predominantly focuses on penalty severity and detection probability, this
study introduces a novel framework that integrates institutional legitimacy, procedural
fairness, and regulatory signaling as primary drivers of voluntary compliance. We propose that corporations respond not merely to coercive threats but to the perceived legitimacy of regulatory institutions and the fairness of enforcement processes. Through
a mixed-methods approach combining archival analysis of enforcement actions from
1995 to 2004 and a unique survey of chief financial officers, we examine how variations in enforcement transparency, consistency, and communicative practices influence
internal compliance investments and ethical climate. Our findings reveal that firms
are significantly more likely to develop robust, proactive compliance programs when
regulators employ transparent, dialogic enforcement strategies that emphasize corrective guidance over punitive sanctions. Conversely, opaque and inconsistently applied
enforcement, even when backed by severe penalties, correlates with minimal, reactive
compliance efforts aimed solely at avoiding detection. The study further identifies a
”compliance threshold” effect, whereby beyond a baseline level of deterrence, enhancements in procedural fairness yield greater marginal increases in compliance quality
than equivalent increases in penalty severity. These results challenge the prevailing
enforcement paradigm in accounting regulation and suggest that regulatory agencies
can amplify their effectiveness by strategically cultivating legitimacy and fairness. The
paper contributes to accounting, regulatory theory, and organizational behavior by
providing a more nuanced, socio-institutional model of compliance motivation, with
direct implications for the design of enforcement regimes and corporate governance
practices.