Unfair SOX 304 Clawback?–Beazer CEO Pays for Restatement without Fault

The SEC recently announced that it reached a settlement with Beazer CEO O'Leary requiring O'Leary to pay back to Beazer more than $1.4 million that he received during a time period when Beazer's financial statements were allegedly misstated.  It is undisputed that the SEC did not charge Mr. O'Leary with fault for the misstatement.  An SEC complaint alleges that an executive accounting officer caused the misstatements by earnings management or smoothing and improper recognition of income.

Nevertheless, the SOX Section 304 clawback requires a public company's CEO and CFO to return bonuses, equity-based incentive compensation and trading profits when misconduct leads to material noncompliance with financial reporting requirements.  The theory being that chief executive and financial officers will work harder to ensure compliance if they are subject to clawback even if they are not at fault.

Even if the rational for the clawback makes some intellectual sense, punishment without personal fault is contrary public standards of justice. Imagine everyone who could have had some involvement or fault in the misstatement-for example possibly including internal audit, the board, compliance and ethics, in-house counsel and mid- or lower-level accounting employees.  Taken to its logical extension, the personal liability rational of Section 304 for the actions of others could equally be applied to mid-management, boards, regulators, legislators and executive elected representatives . . . but it isn't . . . of course . . . because to do so would result in objection from a consequential number of people.

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