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

SUMMARY The Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010 include clawback provisions requiring executives to pay back incentive-based compensation that they earned based on financial statements that are subsequently restated. These provisions intend to reduce unethical behavior, as executives may be less likely to manipulate the financial statements to increase incentive compensation. However, prior research finds that at times executives are less willing to restate financial statements when a company has adopted a clawback (Pyzoha 2015). Relatedly, this paper summarizes the results of a recent study (Brink, Grenier, Pyzoha, and Reffett 2018) that investigates whether auditors might be less likely to propose restatements in the presence of a clawback. Contrary to expectations, results of three experiments, paired with survey and interview data, indicate the presence of a clawback has no effect on auditors' propensity to propose restatements. We discuss implications for practice and provide suggestions for future research.