Clawbacks And Restatements

A major provision of the Dodd-Frank Act requires corporate executives to certify the accuracy of financial statements, in part to help reduce restatements. Another provision of the Act requires that all public companies have a "clawback" provision that permits the recovery of any incentive compensation paid to executives if the restated financial statements show that the incentive compensation should not have been paid. In 2012, 87 percent of publicly traded companies had a clawback provision. Previous research has found that companies with a clawback provision are less likely to have restatements. This was attributed to executives doing a more diligent job when certifying the original financial statements. However, new research indicates that the drop in restatements may also be due to executives fighting restatements. Often, restatements are the result of auditors disagreeing with the original financial statements because of the accounting choices made. Since a restatement that reduces the company's reported performance can cause the initiation of the clawback, corporate executives appear more likely to fight restatements.