New SEC Rule Requires Public Companies to Give Back Bonuses If There Are Wrongdoings in Financial Statements

The Securities and Exchange Commission (SEC) adopted a new rule to prevent executives to gain bonuses if there are mistakes in financial statements.

For any business in general, accounting is a crucial part of operations. 

Maintaining accounting books can take up a lot of time, and if it’s done manually, it could be prone to human error. 

The SEC is focusing on more integrity and accountability post pandemic. The financial regulator wants to hold corporate executives financially accountable for any reporting errors, whether they are the result of fraud or simple accounting mistakes.

SEC commissioners voted to approve the new rule 3-2 this past Wednesday, with all the Democrats approving the plan and Republicans dissenting.

Leaders of large companies often receive the vast majority of their pay from performance-based bonuses. If companies report strong revenue and profits, they’re paid more. So errors in preparing financial statements can have a big impact on executive compensation.

A small mistake in a financial statement could mean the end of the business, as accounting errors could cost money, take up time, or lead to an audit.

If organisations want to reduce accounting errors, they need to ensure that their files on all business transactions are up to date. 

Accountants may make mistakes occasionally, so it’s important to be proactive in catching these mistakes.

To prevent errors in financial statements, businesses should ensure that financial control is spread out among several individuals and that data is double checked consistently so any errors are quickly spotted. 

In light of the SEC’s renewed focus, public companies and their executives should be particularly vigilant by ensuring that their financial statements are accurate and internal controls are strong.