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

Based on a recent SEC proposal, all publicly traded companies will be required to adopt a clawback policy 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 that there is a decrease in restatements for these firms. A recent study, "Why do Restatements Decrease in a Clawback Environment? An Investigation into Financial Reporting Executives' Decision-Making during the Restatement Process" (Pyzoha 2015), uses an experiment to further investigate restatements in a clawback environment by studying executives' (CFOs, controllers, and treasurers) 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. Specifically, the study finds that executives are less likely to agree with restating prior financial statements when their pay con...