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Clawback provisions failing to deter earnings manipulation

CLAWBACK provisions are having little impact on deterring earnings manipulation in the US, a new study has found.

The paper, by the American Accounting Association and appearing in The Accounting Review, found that the use of accruals to manipulate the books has been cut back, but other methods have instead become more popular.

The use of accruals, which can include deliberately misjudged write-offs or inventory valuations, is on the wane as auditors and regulators are more watchful over the various tricks used. Allied with provisions to claw back executive incentive payments where accounts have been misstated, the change has led to a fall in this type of manipulation, according to the study of the 3,000 largest US firms.

However, manipulation of actual transactions has become more prevalent, the study found. An example would be altering actual expenditures to achieve a temporary earnings boost, such as by cutting research and development (R&D) or by slashing prices, or easing credit terms to accelerate sales.

Co-author of the paper, Kevin Chen, of the Hong Kong University of Science and Technology, said: “Mandating clawbacks, as America’s Dodd-Frank legislation does, is at best of dubious value and may actually be counterproductive in its encouragement of management practices, like reduced R&D, that can compromise the long-term competitiveness of a firm.”

The clawback provision was introduced into US law within the 2010 Dodd-Frank Act, as part of plans to reform Wall Street and protect consumers post-financial crisis.

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