This Is What SARBOX Is For . . . Beazer

I meant to get to this yesterday, but travel plans got in the way:

Those regular Sarbox bashers forget that it is all about keeping management honest when it comes to accounting.

The penalties for restated earnings is that management forfeits bonuses and stock options during the period in question.

That is precisely what took place with Ian J. McCarthy (President and Chief Executive Officer of Beazer Homes), who received a Wells notice (a recommendation of civil action) from the SEC:

“The Securities and Exchange Commission may move to claw back a portion of the compensation Beazer Homes USA paid its chief executive during a period for which the company later restated earnings.

Such a move would mark the first time the agency has tried to claw back pay from a sitting CEO who wasn’t alleged to have participated in a corporate fraud . . . In recent months it has sued at least two former executives for back pay even though they weren’t implicated in wrongdoing, a sign the agency is using the tactic more aggressively.

The SEC is relying on a provision of the Sarbanes-Oxley Act that lets the government try to recover incentive-based compensation from senior executives when their company is accused of reporting inaccurate financial data. Sarbanes-Oxley, enacted in 2002 in response to the meltdown of Enron Corp. and other high-profile accounting scandals, was an attempt to penalize companies for misleading investors.

Let’s clarify this so anyone can follow it: If you get a bonus based on earnings, and those earnings are fraudulent, you ust disgorge the bonuses back to S/Hs even if you had nothing to do with the fraud.

Recall Beazer settled accounting charges last year, and was forced to restate earnings going back to 2000. After understateding earnings in years 2000-05, they overstated them in 2006-07.

The comp amounts in question are sizable:

“During that period, Mr. McCarthy received millions of dollars in compensation and bonuses. For the fiscal year ended Sept. 30, 2005, Mr. McCarthy’s pay topped $10 million, including a salary of $1.13 million and a bonus worth more than $7.6 million, according to the SEC. Last year, his total pay was $7.9 million, most of which was from stock and option awards.”

While some are seeking to portray this as controversial, it is not. Yes, it is true that Mr. McCarthy did not commit fraud. But it is also true that due to the restatement, hid did not actually earn these performance bonuses.

Hence, the deserved clawback . . .


SEC Fixes Eye on Pay Of CEO At Beazer
WSJ, NOVEMBER 17, 2009

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