Francine McKenna has an excellent article at Marketwatch explaining why we don’t see more clawbacks.
People with knowledge of SEC enforcement processes say the new Dodd-Frank rules may actually result in even fewer clawbacks than the old ones.
Ironically, expanding the number of executives the rules cover could be a chief reason. While highly visible CEOs and CFOs might previously have been unlikely to resist the enforcement of rules meant to reclaim money earned under the auspices of fraudulent accounting, they say, the new rules—which have no requirement of misconduct—could lead executives with little connection to the financial reporting process to actively fight clawback claims after a restatement.
The new rules also add a new enforcement layer between the company and the government. A company that doesn’t seek clawbacks under its own policies could be delisted by its stock exchange—a stiff penalty, but also one experts say places a heavy burden on exchanges to monitor compliance with complex compensation policies and make rulings that could result in a financial loss to the company and the exchange.
That’s a lot to ask exchanges, experts say, and so they may be more likely to accept company explanations based on the significant discretion the law gives boards to determine whether or not to pursue a clawback.
Meanwhile, the number of clawback-eligible restatements is falling dramatically, according to Audit Analytics. Fewer are reported each year, and the proportion of those considered material enough to warrant a correction to previous financial statements is falling at an even more rapid pace.
SEC Chief Accountant James Schnurr said at a recent conference that Sarbanes-Oxley regulations have reduced corporate fraud. And Bradley J. Bondi, a partner at Cahill, Gordon & Reindel in Washington, says potential clawbacks are not among the chief concerns for companies considering restatements.
But academics and others who have studied these trends believe companies are increasingly just deciding not to consider a restatement material enough to warrant a revision of financial statements.