Public companies are swiftly adopting policies regarding “erroneously awarded compensation” by December 1, 2023, to comply with listing standards required by the new SEC Rule 10D-1. These policies will require companies to recover, or “claw back,” incentive-based compensation previously received by current and former Section 16 officers if that compensation was erroneously awarded based on misreported financial information that the company is subsequently required to restate. The SEC rule and the listing standards are complex, but the impact is clear: public company executives whose compensation includes incentive pay based on one or more financial reporting measures will be at risk of having to pay back compensation if the company is required to prepare an accounting restatement, even if the error was immaterial and no misconduct occurred.
Meanwhile, it has long been the case that if a company becomes aware of a possibility that its prior financial reports contained an error, the company must determine whether an error occurred, determine whether misconduct was involved, and reach conclusions about whether a restatement must occur as well as how to prevent similar errors in the…
