The Effects of Clawbacks on Auditors’ Propensity to Propose Restatements and Risk Assessments

  • William D. Brink
  • Jonathan H. Grenier
  • Jonathan S. Pyzoha
  • Andrew Reffett
Original Paper

Abstract

Both the Sarbanes–Oxley Act of 2002 and the Dodd-Frank Act of 2010 include clawback provisions that require executives to pay back incentive compensation earned on financial statements that are restated in a subsequent period. Such provisions intend to reduce unethical reporting behavior by executives who otherwise might be more inclined to misstate financial statements to boost incentive-based compensation. However, such provisions could promote rather than deter unethical behavior. In particular, Pyzoha (Account Rev 90(6):2515–2536, 2015) finds that, under certain conditions, executives are less willing to restate financial statements in the presence of a clawback policy. Similarly, auditors might also act unethically by being less likely to propose restatements in the presence of clawbacks to avoid upsetting management. To examine this possibility, this study reports the results of three experiments that examine the effect of clawback provisions on auditor judgment. Contrary to expectations, our three experiments, along with supplemental qualitative evidence (surveys and interviews of practicing auditors) consistently indicate that clawbacks do not affect auditors’ propensity to propose restatements. These results suggest that a decrease in the number of restatements in a clawback environment will not be due to auditors acting unethically to appease management. The effects of clawbacks on auditors’ risk assessments, however, are less conclusive. As such, we offer potential post hoc explanations to guide future research.

Keywords

Clawback SOX Dodd-Frank Auditing Restatements Independence 

Notes

Acknowledgements

We thank the auditors who participated in the study and interviews, our expert panel, Regan Schmidt (discussant), three anonymous reviewers, and attendees at the University of Waterloo’s 3rd Biennial Symposium on Accounting Ethics, for their constructive feedback, and Miami University for financial support.

Compliance with Ethical Standards

Ethical Approval

All procedures performed in studies involving human participants were in accordance with the ethical standards of the institutional and/or national research committee and with the 1964 Declaration of Helsinki and its later amendments or comparable ethical standards.

Informed Consent

Informed consent was obtained from all individual participants included in the study.

Supplementary material

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Copyright information

© Springer Science+Business Media B.V., part of Springer Nature 2018

Authors and Affiliations

  • William D. Brink
    • 1
  • Jonathan H. Grenier
    • 1
  • Jonathan S. Pyzoha
    • 1
  • Andrew Reffett
    • 1
  1. 1.Miami UniversityOxfordUSA

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