Why Do Restatements Decrease in a Clawback Environment? An Investigation into Financial Reporting Executives’ Decision-Making during the Restatement Process

Posted: 24 Jul 2013 Last revised: 4 Feb 2020

See all articles by Jonathan Pyzoha

Jonathan Pyzoha

Miami University - Department of Accountancy

Date Written: January 2015

Abstract

Prior archival studies find that firms that voluntarily adopted clawback policies have experienced a reduction in restatements. I experimentally examine this outcome by investigating the influence of two key factors (i.e., executive compensation structure and auditor quality) on financial reporting executives’ (hereafter, “executives”) decision-making regarding a proposed restatement that will lead to a clawback of their incentives. I find that executives (i.e., CFOs, controllers, and treasurers) facing a lower quality auditor are less likely to agree with amending prior financial statements when a higher proportion of their pay is incentive-based. However, this tendency is reduced when executives face a higher quality auditor, indicating that higher quality auditors can act as effective monitors. My results identify an ex post unintended consequence of clawback regulation that could at least partially offset the benefits of the ex ante deterrent effects of clawbacks and that could contribute to findings of less frequent restatements when clawback policies are in place. I discuss potential implications regarding the role of executives during restatement decisions and auditors’ risk assessments in a clawback environment.

Keywords: Clawbacks, Executive compensation structure, Auditor quality, Financial reporting executive, Restatements, Dodd-Frank Act

JEL Classification: M52, M40, M41, K22

Suggested Citation

Pyzoha, Jonathan, Why Do Restatements Decrease in a Clawback Environment? An Investigation into Financial Reporting Executives’ Decision-Making during the Restatement Process (January 2015). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2297501 or http://dx.doi.org/10.2139/ssrn.2297501

Jonathan Pyzoha (Contact Author)

Miami University - Department of Accountancy ( email )

Miami University
800 E. High Street
Oxford, OH 45056
United States
513-529-3913 (Phone)

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