Mitigating risk in response to recent DOJ clawback guidance

Are you taking the right steps?

Oct 12, 2023
Financial management Financial consulting
Accounting compliance SEC matters Dispute advisory Financial investigations

The Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) have both recently provided updated guidance related to clawback requirements that will affect both public and private companies. The risk to corporations cannot be overstated given the current enforcement environment.

The SEC guidelines require listed companies to standardize recovery requirements for erroneously awarded incentive compensation paid to executives due to material financial statement misstatements. Listing standards must go into effect by Oct. 2, 2023, and issuers then have 60 days to implement a compliant clawback policy—until Dec. 1, 2023, at the latest.

In addition, the DOJ implemented a Compensation Incentives and Clawbacks Pilot Program effective March 15, 2023. As a part of criminal case resolutions, companies are required to implement compliance-related criteria directly into their compliance and bonus systems and report implementation to the DOJ’s criminal division. In addition, companies may receive reduced sanctions if they seek to recoup compensation from culpable employees and other responsible parties.  

Areas of focus

Given the updated guidance, your company should focus on two main areas to avoid the consequences of the new SEC clawback regulations and maintain a compensation and bonus system in line with DOJ Clawbacks Pilot Program guidance:

  • Building both a robust system of internal controls and a strong, experienced team to mitigate the possibility of a restatement
  • Evaluating the current compensation and bonus system as compared to DOJ expectations

3 steps your company should take

To implement a robust system of internal controls that is enforced by an experienced team, you need to appropriately analyze and account for complex transactions and mitigate the risk of financial inaccuracy due to fraud or error. To do this, take the following steps:

1. Evaluate your control environment

Your control environment should include both:

a. Preventive controls, which are implemented to decrease the possibility of inaccuracies due to fraud or error that could require a restatement

b. Detective controls, which serve to identify, in a timely manner, inaccuracies that have already occurred to allow the company to correct them before financial statements are issued

2. Align your control environment with your risk appetite

As part of this evaluation process, your company should consider the following:

a. Past events, such as prior-period uncorrected errors

b. Current accounting positions that are subject to significant judgment and interpretation

c. Future business changes

d. Industry and auditor guidance

3. Develop a response plan

Your response plan should include the following:

a. Develop a process for investigating how the error leading to restatement occurred

b. Determine the types of compensation that would be subject to clawback

c. Consider the steps for determining the clawback amount

d. Understand reporting requirements and timing

In addition, when evaluating the current compensation and bonus structure, your company should consider whether it includes the compliance-related criteria required by the DOJ. Including such criteria not only may help prevent misconduct from occurring in the first place but if misconduct does occur, may make it easier for your company to claw back compensation from those involved.

Getting started

Aligning your compensation and clawback processes with new SEC and DOJ guidance can be a complex endeavor—one in which an experienced advisor can provide critical support. For example, RSM US LLP can deliver several key solutions, including:

Identifying control gaps

The most effective way to evaluate your control environment and identify control gaps is to have experienced personnel perform a proactive comprehensive risk assessment. Companies with less-mature internal audit departments or less-experienced accounting personnel may need to engage external advisors with the required capabilities.

Once the risk assessment is complete, either your company itself or your external advisors can identify areas where controls or departments need to be enhanced or implemented to mitigate the risk of financial inaccuracy that might lead to a restatement.

Developing a response plan

In addition to support for strengthening the internal control system, your company may also require assistance developing a detailed response plan, with the above guidance in mind, to deploy in the event of a restatement. Policies need to be established to document how your company will comply with the SEC clawback rules and the DOJ pilot program.

Determining clawback amount

If a restatement does occur and compensation is required to be clawed back, determining the clawback amount can be complicated. Seek out external advisors to perform these calculations if internal personnel lack the necessary knowledge and experience.

Evaluating compensation and bonus structure

Lastly, when evaluating your company’s current compensation and bonus structure against DOJ guidance, external advisors may be helpful not only in suggesting new criteria but also in implementing the updated system.

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