Since we have been focusing on Clawbacks for the last few blogs, I wanted to refer readers to a recently released study by Audit Analytics, showing that, in 2015, public companies filed a total of 737 restatement disclosures. (The quantity of restatement and non-reliance disclosures had peaked in 2006 with 1851 disclosures.) Does that mean 737 companies would have been required to claw back compensation in 2015? Fortunately not.

Not all restatements are equal. The SEC’s proposed rules on Dodd-Frank Section 954 (new Section 10D to the Securities Exchange Act of 1934) require a compensation clawback if “the issuer is required to prepare an accounting restatement due to the issuer’s material noncompliance with any financial reporting requirement under the securities laws.” The proposed rules provide further that: “For purposes of this rule, an accounting restatement is the result of the process of revising previously issued financial statements to reflect the correction of one or more errors that are material to those financial statements.”

I’m not an accountant, but my understanding is that there is a difference between “Big R” restatements (also known as “reissuance” restatements) and “little r” restatements (also known as “revision” restatements). The proposed rules would not require a clawback in the case of a “little r restatement,” where a company corrects immaterial errors in previously-issued financial statements by correcting them in a current period report, without reissuing the historical financial statements. Only a Big R restatement would be an “accounting restatement” under the SEC rule. When an error is material to prior period financial statements, a company is required to restate previously issued financial statements and correct the error (usually in a Form 10-K/A filing), thus, reissuing those financial statements. Of the 737 “restatements,” apparently only 52 were of the Big R reissuance restatement variety.

The SEC’s proposing release lists certain types of changes to a company’s financial statements that do not represent error corrections, and therefore, would not require application of the company’s clawback policy. However, the proposing release also warns: “We note that issuers should consider whether a series of immaterial error corrections, whether or not they resulted in filing amendments to previously filed financial statements, could be considered a material error when viewed in the aggregate.”

The foregoing are among the many, many issues we will need to keep in mind and potentially explain to directors when we all eventually begin revising our clawback policies to comply with the final rules under Dodd-Frank Act Section 954. Ron Mueller, Mike Kesner, and I will be discussing as many of those issues as we can on our Clawback panel at the 13th Annual Executive Compensation Conference in Houston later this month. Hope to see you there.