The Advisors' Blog

With the December 1st compliance deadline looming for listed companies to adopt a Dodd-Frank clawback policy, most companies have survived “step 1” of this new requirement. Unfortunately, adopting the policy was the easy part. This King & Spalding memo points out that the specter of recoupment likely will complicate internal investigations into financial errors. Here’s an excerpt:

If executive officers received incentive-based compensation based on a financial reporting measure that subsequently must be restated, clawbacks may be required no matter how small the original errors were, no matter whether misconduct led to the errors and no matter whether the executives in question had any role in the errors. It will be natural for executives to prefer not to return compensation to a company once they received it, so the executives naturally would prefer that no restatement occurred. The new requirement that actions taken pursuant to required clawback policies must be disclosed puts even more pressure on these executives because any return of compensation will become public. As a result, the new rules create a potential conflict of interest that must be examined at the outset of every internal investigation involving a potential accounting restatement.

The memo concludes on this cheery note:

In short, audit committees may be conducting more internal investigations and executives may not get information during the investigations. These circumstances will be frustrating to everyone, and experienced outside counsel will be essential to navigating them. Outside counsel advising companies and their audit committees should thoroughly understand the potential errors being investigated and how they might have impacted incentive-based compensation that could be subject to clawback in order to assess potential conflicts of interest of current and former executives.

And companies can no longer take comfort that “little r” restatements (correcting an immaterial error from a prior period that would result in a material misstatement if the error were corrected, or left uncorrected, in the current period) have no significant impact. The impact on financial statements may not be significant, but if clawbacks are required, that can be very significant to current and former executives.

John shared tips on internal investigation processes last week on TheCorporateCounsel.net. We have a lot of resources on that site in our “Internal Investigations” Practice Area. And now that everyone’s required Dodd-Frank clawback policies are in place, we will be sharing more & more about navigating recoupment issues in the “Clawbacks” Practice Area of this site.

This blog will return next week. Happy Thanksgiving!

– Liz Dunshee