October 21, 2014

Clawbacks & The New Revenue Recognition Rules: On a Collision Course?

Here’s something I just blogged on’s “The Advisors Blog“:

As companies are staffing & gearing up for the FASB/IASB’s new revenue recognition rules, it dawned on me that folks in the accounting world might not be aware of the upcoming Dodd-Frank rulemaking on clawbacks. And those folks that live and breathe compensation might not be aware of the revenue recognition accounting changes that were adopted a few months back (but won’t be effective until fiscal years beginning after 12/15/16).

The implementation of the new revenue recognition rules will create all sorts of opportunities to get it wrong – and it looks like they will coincide with mandatory no-fault clawbacks that have to be applied to a broader range of executives for a longer period of time for any restatement. Section 954 of Dodd-Frank is quite prescriptive so I don’t know how the SEC will have much flexibility. Maybe in the implementation and grandfathering provisions. This convergence of forces may well make for a dandy of a sleeper in Dodd-Frank, years after it was enacted!

The upshot is that we may be living in a world where senior managers will be trying to persuade compensation committees to either have less performance-based compensation that is susceptible to a restatement – or to use metrics that are less susceptible. Stepping back from performance-based pay is not what shareholders want to see – so this likely will cause tension between companies and their shareholders.

It’s ironic that a new accounting standard that will cause more opportunities for restatements will apparently come on board near in time with the Dodd-Frank “super-charged” clawbacks. These newer clawbacks will be super-charged because you don’t need misconduct like under the Sarbanes-Oxley standard.

And the kicker to watch out for right now is that as more companies move to multi-year performance metric setting, there could be companies that are setting performance goals now for years that will be subject to both the new revenue recognition rules (no matter how they wind up getting interpreted) and the Dodd-Frank clawbacks.

The bottom line is that the new clawbacks will certainly up the ante in discussions among auditors, audit committees and management as to whether errors discovered in previously filed financials are material. As with any area of uncertainty, step with caution. Thanks to Steve Bochner of Wilson Sonsini for pointing this out!

Q&A With Bob Monks & Nell Minow

I’m always curious as to what Bob and Nell think about the issues of the day – here’s a USA Today interview that provides the latest from them…

Webcast: “Anatomy of a Proxy Contest: Process, Tactics & Strategies”

Tune in tomorrow for the webcast – “Anatomy of a Proxy Contest: Process, Tactics & Strategies” – during which experts with different perspectives on proxy contests will catch us up on all the latest: ISS’ Chris Cernich, Joele Frank’s Dan Katcher, Greenberg Traurig’s Cliff Neimeth and MacKenzie Partner’s Paul Schulman.

– Broc Romanek