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

Journal of business ethics, 2019-08, Vol.158 (2), p.313-332 [Peer Reviewed Journal]

Springer Nature B.V. 2019 ;Springer Science+Business Media B.V., part of Springer Nature 2018 ;Journal of Business Ethics is a copyright of Springer, (2018). All Rights Reserved. ;ISSN: 0167-4544 ;EISSN: 1573-0697 ;DOI: 10.1007/s10551-018-3846-x

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Title:
The Effects of Clawbacks on Auditors' Propensity to Propose Restatements and Risk Assessments
Author: Brink, William D. ; Grenier, Jonathan H. ; Pyzoha, Jonathan S. ; Reffett, Andrew
Subjects: Auditors ; Audits ; Business and Management ; Business Ethics ; Clawback ; Compensation ; Education ; Ethics ; Executive compensation ; Expectations ; Experiments ; Financial reporting ; Financial restatements ; Financial statements ; Incentives ; Judgments ; Management ; Original Paper ; Philosophy ; Provisions ; Qualitative research ; Quality of Life Research ; Repossession ; Risk assessment ; Risk management ; THEMATIC SYMPOSIUM ARTICLES ; Unaudited financial statements ; Wall Street Reform & Consumer Protection Act 2010-US
Is Part Of: Journal of business ethics, 2019-08, Vol.158 (2), p.313-332
Description: Both the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010 include clawback provisions that require executives to pay back incentive compensation earned on financial statements that are restated in a subsequent period. Such provisions intend to reduce unethical reporting behavior by executives who otherwise might be more inclined to misstate financial statements to boost incentive-based compensation. However, such provisions could promote rather than deter unethical behavior. In particular, Pyzoha (Account Rev 90(6):2515-2536, 2015) finds that, under certain conditions, executives are less willing to restate financial statements in the presence of a clawback policy. Similarly, auditors might also act unethically by being less likely to propose restatements in the presence of clawbacks to avoid upsetting management. To examine this possibility, this study reports the results of three experiments that examine the effect of clawback provisions on auditor judgment. Contrary to expectations, our three experiments, along with supplemental qualitative evidence (surveys and interviews of practicing auditors) consistently indicate that clawbacks do not affect auditors' propensity to propose restatements. These results suggest that a decrease in the number of restatements in a clawback environment will not be due to auditors acting unethically to appease management. The effects of clawbacks on auditors' risk assessments, however, are less conclusive. As such, we offer potential post hoc explanations to guide future research.
Publisher: Dordrecht: Springer
Language: English
Identifier: ISSN: 0167-4544
EISSN: 1573-0697
DOI: 10.1007/s10551-018-3846-x
Source: ProQuest One Psychology
ProQuest Central

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

Springer Nature B.V. 2019 ;Springer Science+Business Media B.V., part of Springer Nature 2018 ;Journal of Business Ethics is a copyright of Springer, (2018). All Rights Reserved. ;ISSN: 0167-4544 ;EISSN: 1573-0697 ;DOI: 10.1007/s10551-018-3846-x

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