SEC “claws back” bonuses and stock sale profits from CFOs of public company charged with accounting fraud

Abstract

Purpose – To explain an increasingly common practice of the US Securities and Exchange Commission (SEC) by which it seeks to “claw back” bonus and incentive compensation paid to CFOs of companies charged with accounting fraud, regardless of the personal involvement, knowledge, or culpability of the CFOs. Design/methodology/approach – This article details the facts underlying a recent SEC accounting fraud settlement through which two former CFOs of a company charged with fraud agreed to repay their bonuses and incentive compensation, despite not having been accused of any wrongdoing. The article goes on to outline the historic use of Section 304(a) of the Sarbanes-Oxley Act of 2002 (SOX), the provision that endows the SEC with this enforcement authority, in search of guidance for when and why the SEC may choose to exercise its authority under this provision. Findings – The SEC’s inconsistent use of its enforcement authority under Section 304(a) leaves chief financial officers potentially subject to individual liability and ill-equipped to modify their behaviour in order to prevent it. Originality/value – This article intends to raise industry awareness about the potential exercise of the broad enforcement power available to the SEC under Section 304(a) and call attention to the lack of guidance provided to corporate officers to avoid liability under this provision.