Research by an NDSU accounting faculty member influenced a recent Securities and Exchange Commission rule regarding the clawback rules for erroneously earned compensation. The rule on “Standards for Recovery of Erroneously Awarded Compensation” was approved Nov. 2.
The research by Rachel Thompson, assistant professor of accounting, can be found in the paper, “Reporting Misstatements as Revisions: An Evaluation of Managers’ Use of Materiality Discretion.”
Her study was cited several times during the rule-making process and in the final rule. “Particularly, my findings likely served as one of the impetuses for the inclusion of little r restatements (also called revisions) as a clawback trigger in the updated rule,” Thompson said.
According to Thompson, her research found that firms were opportunistically reporting misstatements as revisions to avoid a clawback. “I find that managers who are subject to restatement-triggered clawback provisions that require managers to repay erroneously earned compensation are more likely to report their error corrections as revisions instead of restatements,” she said. “Error corrections made as revisions, often called little r restatements, do not typically trigger a firms’ voluntarily adopted clawback policy whereas restatements, often called Big R restatements, do.”
Because of her work, Thompson is quoted in an article, titled “Small Errors Hold Big Stakes in Executive Pay Clawback Rule (1),” published Oct. 28 by the Bloomberg Tax webpage. The story was written by Andrew Ramonas, corporate disclosure reporter, and reporter Nicola M. White.
According to the article, companies are using smaller revisions instead of formal restatements to avoid compensation repayment. The reporters said accounting mistakes that require Big R restatements are more likely to require companies to consider clawing back bonuses.
“These Big Rs are more likely to move the needle — they’re more likely to actually result in a change in compensation and require clawback,” Thompson is quoted in the article. “With Little Rs, there will be some. The inclusion of them will have a difference, but how much is yet to be seen.”
Thompson joined the NDSU faculty in 2020. She earned her bachelor’s, master’s and doctoral degrees in accounting at the University of Minnesota.
As a student-focused, land-grant, research university, we serve our citizens.
