The Influence of Auditor Quality and Executive Compensation Structure on Financial Reporting Executives' Restatement Decisions in a Clawback Environment

Abstract

Based on a recent SEC proposal, publicly traded companies will be required to adopt a clawback in accordance with the Dodd-Frank Act. In response, firms have been voluntarily adopting clawbacks at an increasing rate. Prior research finds one benefit of voluntarily adopting a clawback is a decrease in restatements. A recent study by Pyzoha (2015) uses an experiment to further investigate restatements in a clawback environment by studying executives' restatement decisions based on auditor quality and executive compensation structure. Results show there may be an unintended consequence of clawbacks that partially offsets the aforementioned benefit. The study finds executives are less likely to agree with restating financial statements when their pay consists of a higher percentage of incentives and there is a lower quality auditor. Importantly, the study shows this tendency is reduced with a higher quality auditor. This article summarizes the study's motivation, research method, results, and practical implications.