The proverb says that “money talks,” and it is widely assumed that financial companies make campaign contributions and spend money on lobbying in the expectation of exerting influence. But are their expectations fulfilled?

Building on previous studies of the corrupting power of money, a new research paper by Maria M. Correia, an assistant professor of accounting at the London Business School, finds a strong correlation between a financial company’s political expenditures and the frequency of accounting fraud enforcement actions taken against that company by the Securities and Exchange Commission (SEC).

Correia looked at some 4,000 cases in which companies had to correct their financial statements (an event that often triggers an SEC investigation) between 1996 and 2006. Her study showed that politically connected firms, as reflected by their PAC contributions and lobbying expenditures, were significantly less likely to be singled out for enforcement actions, and, when prosecuted, faced lower penalties.

Companies that made a point of contributing to elected officials with potential influence over the SEC (such as the members or, better still, the chairpersons of congressional oversight committees) were even less likely to face an enforcement action or penalty. An extra $1 million spent in PAC contributions over the previous five years correlated with a sharp reduction in the probability of an enforcement action, from 8.58% to 3.43%.

In one of her most remarkable conclusions, Correa found that a $100,000 increase in PAC contributions over a five-year period was associated with an 11% decrease in monetary penalties imposed by the SEC. The average penalty levied by the SEC during the time studied by Correia was slightly more than $20 million. By spending an additional $100,000 in contributions, then, a company could save a few million dollars – a remarkable return on investment.

Judging by their actions, financial firms appear to think political spending is worthwhile. In all, during the current election cycle, Wall Street banks and financial interests have spent more than $800 million on lobbying and campaign contributions, according to a recent AFR analysis. That works out to about $1.5 million a day.

From Correia’s research, we are increasingly confident that the industry’s money does indeed buy it influence, and that its influence can improve the corporate bottom line. We also know, more surely than ever, that the rest of us have a large stake in continuing to push for limits on the role of money in politics, and in keeping close watch over the triangle of relationships involving Congress, the regulators, and the regulated.

 — Alec Lee

See Big Connection Between Campaign Contributions and Lack of SEC Prosecutions