May 08, 2015
Only two in five corporate financial restatements affected the corporate bottom line in 2014, according to recent research by Audit Analytics, and the proportion of companies affected has dropped by 22 percentage points over the past four years, raising questions as to how often incentive compensation would be subject to a Dodd-Frank-compliant clawback. The Dodd-Frank clawback provision requires companies in the event of certain financial restatements to recoup "incentive-based compensation (including stock options)" from current and former executive officers received within the last three years that would not have been received, regardless of fault. As the Center has explained, the statutory requirement is ambiguous and will require the SEC to make several determinations. The Commission is reportedly developing a proposed rule that, when finalized, will serve as the framework for a listing requirement by the national securities exchanges. However, with data demonstrating that close to 60 percent of 2014 restatements did not impact the bottom line, and the average downward adjustment down from $6.6 million in 2013 to $4.4 million in 2014, significant questions arise as to how often recoupment would be required under a final clawback rule. This is because, without changes to the bottom-line, there are not likely to be resulting adjustments in awarded incentive compensation. Furthermore, it is less likely a restatement which does not impact a company's bottom line would be considered to have resulted from "material noncompliance" with reporting requirements as required under the Dodd-Frank clawback. The Audit Analytics report, which was cited by the Wall Street Journal, credited the more stringent accounting requirement in Section 404 of the Sarbanes Oxley Act for the decrease in the number and amount of restatements. The data and recent trend may be helpful in encouraging the SEC to provide more flexibility in the clawback rule.