Voluntary Clawback Adoption and the Use of Financial Measures in CFO Bonus Plans

ABSTRACT Firms trade off CFOs' fiduciary duties against their decision-making duties when designing CFO bonus plans. Decreasing bonus incentives tied to financial measures benefits CFOs' fiduciary responsibilities at the expense of motivating their decision-making duties. As prior research indicates that clawbacks increase personal misreporting costs through the loss of previously awarded compensation, we examine whether clawbacks allow firms to increase incentives in CFO bonus contracts. Based on a sample of U.S. firms between 2007 and 2013, we find that clawbacks are associated with greater CFO bonus incentives. We also find the increase in incentives to be more pronounced for CFOs relative to other executives. Our results are moderated by firms' susceptibility to misreporting. The relation between clawbacks and incentives is weaker when firms experienced internal control deficiencies, have larger abnormal accruals, when CFOs are more vulnerable to pressure from CEOs, and when audit committees have less financial expertise and prestige.

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Corporate governance characteristics of firms reporting internal control deficiencies

Corporate Ownership and Control ◽

10.22495/cocv8i2c3p4 ◽

2011 ◽

Vol 8 (2) ◽

pp. 363-390

Author(s):

Kathleen Rupley

Keyword(s):

Corporate Governance ◽

Internal Control ◽

Audit Committee ◽

Internal Audit ◽

High Growth ◽

Audit Committees ◽

Market Reactions ◽

Sarbanes Oxley ◽

Internal Control Deficiencies ◽

Nominating Committees

From a sample of firms reporting internal control deficiencies (ICD), I compare corporate governance structures to industry, exchange, and size – matched firms. I examine market reactions to reports of ICDs in 8-K filings. Additionally, I examine shifts in corporate governance characteristics since the Sarbanes-Oxley Act of 2002 (SOX). Results indicate that weaker boards, larger audit committees, less independent nominating committees, and high growth companies are associated with ICDs. Market reaction is negative to ICD disclosures when they are associated with controls over revenue. Firms have made changes post-SOX including reduced non-audit services, more frequent audit committee meetings, formation of nominating and governance committees, creation of internal audit functions, and implementation of corporate governance policies.

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The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality

The Accounting Review ◽

10.2308/accr.2008.83.1.217 ◽

2008 ◽

Vol 83 (1) ◽

pp. 217-250 ◽

Cited By ~ 480

Author(s):

Hollis Ashbaugh-Skaife ◽

Daniel W. Collins ◽

William R. Kinney ◽

Ryan LaFond

Keyword(s):

Internal Control ◽

Strong Evidence ◽

Control Problems ◽

Cross Sectional ◽

Accrual Quality ◽

Control Quality ◽

Internal Control Weaknesses ◽

Abnormal Accruals ◽

Internal Control Deficiencies

This paper investigates the effect of internal control deficiencies and their remediation on accrual quality. We first document that firms reporting internal control deficiencies have lower quality accruals as measured by accrual noise and absolute abnormal accruals relative to firms not reporting internal control problems. Second, we find that firms that report internal control deficiencies have significantly larger positive and larger negative abnormal accruals relative to control firms. This finding suggests internal control weaknesses are more likely to lead to unintentional errors that add noise to accruals than intentional misstatements that bias earnings upward. Third, we document that firms whose auditors confirm remediation of previously reported internal control deficiencies exhibit an increase in accrual quality relative to firms that do not remediate their control problems. Finally, we find firms that receive different internal control audit opinions in successive years exhibit changes in accrual quality consistent with changes in internal control quality. Collectively, our cross-sectional and intertemporal change tests provide strong evidence that the quality of internal control affects the quality of accruals.

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The Unintended Consequences of Internal Controls Reporting on Tax Decision Making

Journal of the American Taxation Association ◽

10.2308/atax-52514 ◽

2019 ◽

Vol 42 (1) ◽

pp. 83-102

Author(s):

Victoria J. Hansen

Keyword(s):

Decision Making ◽

Financial Reporting ◽

Internal Control ◽

Unintended Consequences ◽

Internal Controls ◽

Corporate Tax ◽

Material Weakness ◽

Reporting Requirements ◽

Internal Control Deficiencies ◽

The Impact

ABSTRACT This study investigates the impact of the internal controls over financial reporting requirements (ICFR) on the decision making of corporate tax executives. I examine tax executives' decisions to disclose an internal control deficiency by amending a prior year return when the internal control deficiency will be classified as either a significant deficiency or a material weakness. I also examine if tax executives' decisions are impacted by whether amending results in a refund or additional tax due. I find tax executives are less likely to disclose (amend) when the internal control deficiency is classified as a material weakness. When facing a material weakness, 16.7 percent choose not to disclose. Tax executives are also less likely to disclose (amend) when amending results in additional tax due. These results indicate the ICFR requirements may have unintended consequences. If executives do not disclose internal control deficiencies, the reliability of financial reporting is limited.

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Decision-making studies: I. The trade-off of variables in decision making.

PsycEXTRA Dataset ◽

10.1037/e460282004-001 ◽

1960 ◽

Author(s):

J. R. Hayes ◽

Elizabeth C. Smith

Keyword(s):

Decision Making ◽

Trade Off

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An Analysis of the Demand for Reporting on Internal Control

Accounting Horizons ◽

10.2308/acch.2000.14.3.325 ◽

2000 ◽

Vol 14 (3) ◽

pp. 325-341 ◽

Cited By ~ 58

Author(s):

Heather M. Hermanson

Keyword(s):

Decision Making ◽

Financial Reporting ◽

Internal Control ◽

Operational Definition ◽

Financial Statement ◽

Individual Investors ◽

Internal Auditors ◽

Additional Information ◽

User Groups ◽

Definition Of

The purpose of this study is to analyze the demand for reporting on internal control. Nine financial statement user groups were identified and surveyed to determine whether they agree that: (1) management reports on internal control (MRIC) are useful, (2) MRICs influence decisions, and (3) financial reporting is improved by adding MRICs. In addition, the paper examined whether responses varied based on: (1) the definition of internal control used (manipulated as broad, operational definition vs. narrow, financial-reporting definition) and (2) user group. The results indicate that financial statement users agree that internal controls are important. Respondents agreed that voluntary MRICs improved controls and provided additional information for decision making. Respondents also agreed that mandatory MRICs improved controls, but did not agree about their value for decision making. Using a broad definition of controls, respondents strongly agreed that MRICs improved controls and provided a better indicator of a company's long-term viability. Executive respondents were less likely to agree about the value of MRICs than individual investors and internal auditors.

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Making the most of individual differences in joint decisions

10.1093/oso/9780198789710.003.0004 ◽

2018 ◽

Author(s):

Bahador Bahrami

Keyword(s):

Decision Making ◽

Direct Evidence ◽

Cross Cultural ◽

Collective Decision Making ◽

Wisdom Of Crowds ◽

Trade Off ◽

Adaptive Value ◽

Joint Decisions ◽

Cultural Data ◽

Better Than

Evidence for and against the idea that “two heads are better than one” is abundant. This chapter considers the contextual conditions and social norms that predict madness or wisdom of crowds to identify the adaptive value of collective decision-making beyond increased accuracy. Similarity of competence among members of a collective impacts collective accuracy, but interacting individuals often seem to operate under the assumption that they are equally competent even when direct evidence suggest the opposite and dyadic performance suffers. Cross-cultural data from Iran, China, and Denmark support this assumption of similarity (i.e., equality bias) as a sensible heuristic that works most of the time and simplifies social interaction. Crowds often trade off accuracy for other collective benefits such as diffusion of responsibility and reduction of regret. Consequently, two heads are sometimes better than one, but no-one holds the collective accountable, not even for the most disastrous of outcomes.

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