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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