Insights Article
Get the latest insights and updates delivered to your inbox.
In the first quarter of 2025, 141 publicly traded companies checked the new “error correction” box on the cover page of their annual reports—a disclosure requirement that had only been in effect since the 2023 reporting cycle.[¹] Of those 141, only 58 indicated that they had conducted the required compensation recovery analysis. And of those 58, exactly four companies actually clawed back executive pay.[¹]
Four. Out of 141 acknowledged errors.
For institutional investors, those numbers should not inspire confidence in a system working as intended. They should provoke a far more uncomfortable question: if the new clawback rules were designed to hold executives accountable when financial statements contain errors, why are so few errors triggering actual accountability—and what is happening to the errors that fall just below the line?
The answer lies in one of the most consequential—and least discussed—dynamics in modern financial reporting: the materiality judgment. And the new clawback rules, far from disciplining that judgment, may be distorting it in ways that make financial statements less reliable, not more.
Get the latest insights delivered to your inbox.
To understand the problem, institutional investors must first understand the three-tiered system through which accounting errors are classified and corrected in the United States.
Tier One: The Big R Restatement. When a company identifies an error that is material to its previously issued financial statements, it must restate those financials—amending prior filings, issuing an Item 4.02 Form 8-K notifying investors that previously filed financial statements can no longer be relied upon, and subjecting the corrected financials to re-audit. This is the most visible and consequential form of error correction. It attracts immediate market attention, triggers securities litigation risk, and—since late 2023—mandates a compensation recovery analysis under SEC Rule 10D-1.[²]
Tier Two: The “Little r” Revision. When an error is immaterial to the previously issued financial statements but would be material if corrected in, or left uncorrected in, the current period, the company revises its prior-period comparative financial statements in its current filing. No Form 8-K is required. No prior filings are amended. The auditor’s report is generally not reissued with an explanatory paragraph. The correction may appear only in the footnotes or comparative columns of the current year’s financial statements.[³] Under Rule 10D-1, little r revisions also technically trigger the compensation recovery analysis—a fact that many companies appear to have struggled to implement in the rule’s first full year of operation.[¹]
Tier Three: The Out-of-Period Adjustment. When an error is immaterial to both the previously issued financial statements and the current-period financial statements, the company simply corrects it as an adjustment in the current period. No restatement of any kind is required. No prior-period financials are revised. No 8-K is filed. No clawback analysis is triggered.[⁴] The correction is, for all practical purposes, invisible to any investor who is not reconstructing the financial statements line by line.
The critical insight is this: the boundary between Tier Two and Tier Three—between a little r revision that triggers a clawback analysis and an out-of-period adjustment that triggers nothing—is a materiality judgment made by management, reviewed by the auditor, and overseen by the audit committee. It is a judgment call. And like all judgment calls in financial reporting, it is susceptible to bias.
When the SEC adopted Rule 10D-1 in October 2022—seven years after it was first proposed under the Dodd-Frank Act—the Commission made a deliberate decision to cast a wide net. The final rule requires clawback policies to cover not only Big R restatements but also little r revisions, a significant expansion from the original proposal that many commentators had urged the SEC to narrow.[⁵] The Commission’s rationale was straightforward: both types of restatements address material noncompliance with financial reporting requirements, and limiting clawbacks to Big R restatements alone would create an obvious incentive to classify errors as immaterial to prior periods to avoid triggering recovery obligations.[⁵]
The SEC’s logic was sound in principle. But the rule’s architects appear to have underestimated the power of the third tier.
By capturing little r revisions within the clawback framework, Rule 10D-1 did not eliminate the incentive to downgrade error classifications—it simply moved the pressure point. The incentive for management is no longer to reclassify a Big R as a little r. It is to reclassify an error that would otherwise warrant a little r revision as an immaterial out-of-period adjustment—Tier Three—which triggers no restatement of any kind and no clawback analysis whatsoever.[⁴]
The distinction between a little r revision and an out-of-period adjustment turns on a single question: would correcting the error in, or leaving it uncorrected in, the current period’s financial statements cause a material misstatement? If yes, a little r revision is required and the clawback machinery activates. If no, the error can be corrected quietly as a current-period adjustment, and the clawback rules do not apply.
That single question is now the most consequential materiality judgment in corporate financial reporting. And it is being made by the same executives whose compensation is at stake in the answer.
The long-term data on restatement trends provides suggestive, if not yet definitive, evidence that the classification of errors has been shifting toward lower tiers for years—a trend that the clawback rules may be accelerating.
According to Ideagen Audit Analytics, total restatements filed by SEC-reporting companies reached 479 in 2024, a roughly ten percent increase over the 434 filed in 2023—with the majority of the increase attributable to restatements by former clients of the defunct audit firm BF Borgers.[⁶] But the composition of those restatements has been shifting for two decades. In 2005, the first full year after the SEC mandated 8-K disclosure for Big R restatements, reissuance restatements represented the majority of total error corrections. By 2019, little r revisions accounted for approximately 80 percent of all restatements—the highest percentage in the nearly two decades that Audit Analytics had tracked.[⁷]
What the restatement data alone cannot capture is the volume of Tier Three out-of-period adjustments—corrections that, by definition, do not appear in restatement databases because they are classified as immaterial. Audit Analytics has tracked these adjustments separately and found a persistent inverse relationship: as Big R restatements declined over the past two decades, out-of-period adjustments rose, peaking at 330 in 2016 before moderating.[⁸] The implication, as Audit Analytics itself noted, is that “errors are being corrected before evolving to a magnitude necessitating a reissuance restatement”—or, stated more critically, that the same errors are being classified at lower severity levels.[⁸]
Now layer the clawback rules on top of this pre-existing trend. In the first full year of Rule 10D-1 implementation, the gap between companies checking the error correction box and companies conducting the required recovery analysis was enormous. In Q1 2024, only 20 of approximately 140 companies with error corrections marked the recovery analysis box. By Q1 2025, that number improved to 58 out of 141—but nearly 60 percent of companies that acknowledged an error correction still did not indicate that a clawback analysis had been performed.[¹] The SEC felt compelled to issue a series of Compliance and Disclosure Interpretations in April 2025 to clarify that both Big R and little r restatements require the error correction checkbox, while out-of-period adjustments do not.[¹]
The pattern is troubling. Companies are acknowledging errors. Many are not performing the required clawback analysis. And the ones that do perform the analysis almost never actually recover compensation. In all of 2024, only two companies enforced clawbacks. In Q1 2025, the number rose to four.[¹] The most parsimonious explanation is not that companies are committing errors that conveniently never affect executive pay. It is that the materiality judgments determining whether an error triggers a clawback are being influenced—consciously or not—by the consequences of that determination.
Get the latest insights delivered to your inbox.
The SEC has long recognized that materiality is not a purely mechanical calculation. Staff Accounting Bulletin No. 99, issued in 1999, established that a quantitatively small misstatement can still be material if qualitative factors make it significant—including, explicitly, “whether the misstatement has the effect of increasing management’s compensation.”[⁹] SAB 108, issued in 2006, further tightened the framework by requiring companies to evaluate errors using both a “rollover” approach (measuring the error’s impact on the current year) and an “iron curtain” approach (measuring the cumulative effect of the error on the balance sheet), and to restate if the error is material under either methodology.[¹⁰]
In theory, these frameworks should prevent management from engineering materiality conclusions to avoid clawbacks. In practice, they face two structural limitations.
First, the qualitative factors in SAB 99—while comprehensive in theory—require the same management team that would be subject to a clawback to honestly assess whether the error they identified is one that is qualitatively significant enough to be material. The conflict of interest is inherent and obvious. An error that triggers a little r revision triggers a clawback analysis, which may result in executives being required to return compensation. The same error, if classified as an out-of-period adjustment, triggers neither. The financial incentive to conclude that the error is immaterial to both prior and current periods—and therefore requires only a Tier Three correction—is direct, personal, and potentially significant.
Second, the audit committee’s oversight role, while critically important, is constrained by information asymmetry. Audit committees rely on management to present the materiality analysis, including the quantitative and qualitative factors that inform the classification decision. A well-constructed materiality memorandum can present a persuasive case for immateriality—particularly when the quantitative impact falls below traditional percentage thresholds (the commonly cited 5 percent of pre-tax income, though SAB 99 explicitly cautions against bright-line tests).[⁹] Unless audit committee members have independent forensic expertise or access to independent advisory resources, they may lack the basis to challenge management’s judgment—even when that judgment is influenced by clawback exposure that the committee itself may not fully appreciate.
The SEC’s then-acting Chief Accountant, Paul Munter, warned about precisely this dynamic in March 2022—before the clawback rules were even finalized. In a public statement, he disclosed that the SEC’s Office of the Chief Accountant had “observed that some materiality analyses appear to be biased toward supporting an outcome that an error is not material to previously-issued financial statements, resulting in ‘little r’ revision restatements,” and he urged registrants, auditors, and audit committees to eliminate from their analyses “their own biases, including those related to potential negative impacts of a restatement.”[¹¹] The subsequent adoption of Rule 10D-1, by extending clawback exposure to little r revisions, intensified rather than resolved the bias Mr. Munter identified—it simply pushed the pressure further down the classification hierarchy, from the Big R / little r boundary to the little r / out-of-period adjustment boundary.
The practical consequence of this dynamic is that the most important accounting errors at publicly traded companies may be increasingly invisible to traditional analytical frameworks.
Most institutional investors—and most sell-side analysts—monitor for Big R restatements. These are material events. They appear in 8-K filings, trigger immediate price adjustments, and show up in restatement databases and screening tools. Some more sophisticated investors also track little r revisions, though these require closer reading of comparative financial statements and footnote disclosures. But virtually no systematic monitoring framework exists for out-of-period adjustments, which are the form of error correction that the clawback rules most directly incentivize.
This is the blind spot. When a company identifies an accounting error and concludes—through a materiality analysis that its executives have a personal financial interest in reaching—that the error is immaterial to both prior and current periods, the correction occurs silently. No 8-K. No amended filing. No restatement disclosure. No clawback analysis. The error is absorbed into the current period’s financial statements as though it were an ordinary adjustment, and the investors who relied on the accuracy of the prior-period financials are never informed that those financials contained an error.
The forensic investor’s challenge is to identify when these invisible corrections are occurring—and to assess whether the underlying materiality judgment was reached independently or under the influence of clawback avoidance.
At Buxton Helmsley, our forensic approach to financial statement analysis has always emphasized that the most consequential information is often found in the places investors are least inclined to look. The emergence of clawback-driven materiality distortions reinforces this principle. For institutional investors seeking to identify companies where error classifications may be influenced by compensation considerations, we recommend the following framework.
First, monitor the new 10-K cover page checkboxes. Since the implementation of Rule 10D-1, the cover page of every annual report on Form 10-K includes two checkboxes: one indicating whether the filing includes an error correction to previously issued financial statements, and another indicating whether any such correction triggered a recovery analysis. A company that checks the error correction box but does not check the recovery analysis box is telling investors one of two things: either the error was an out-of-period adjustment that the company determined was immaterial, or the company has not complied with its disclosure obligations. Either conclusion warrants scrutiny—particularly for companies where executive incentive compensation is tied to the financial reporting measures affected by the error.[¹]
Second, read the footnotes with forensic intent. Out-of-period adjustments, when disclosed, typically appear in the footnotes to the financial statements—often in the summary of significant accounting policies or in the notes accompanying specific line items. Look for language indicating that the current period includes corrections of errors originating in prior periods. Compare the direction and magnitude of these adjustments against the financial reporting measures that drive executive compensation. An out-of-period adjustment that increases revenue or operating income in a year when management’s bonus targets were otherwise at risk is not proof of manipulation—but it is a signal that the materiality classification deserves independent evaluation.
Third, track unexplained changes in key financial statement line items. When a company’s comparative financial statements include revised prior-period figures that differ from the amounts previously reported—without a corresponding restatement disclosure or change in accounting principle—the revisions may reflect a little r correction that was embedded into the comparative presentation without prominent disclosure. Comparing the prior-period figures in the current year’s 10-K against the same figures as originally reported in the prior year’s 10-K can reveal corrections that might otherwise escape notice.
Fourth, evaluate the independence of the materiality analysis. Review the audit committee’s charter and proxy statement disclosures for evidence that the committee has independent authority to engage outside advisors for materiality assessments—and whether it has exercised that authority. In the post-clawback environment, best governance practice would include audit committee retention of independent forensic or accounting advisors to review management’s materiality conclusions whenever an identified error could affect executive compensation metrics. Companies that have not adopted this practice are relying entirely on management’s self-assessment of an issue in which management has a direct financial interest.
Fifth, cross-reference error corrections against executive compensation disclosures. When a company discloses an error correction of any kind—Big R, little r, or out-of-period—review the proxy statement’s Summary Compensation Table and the performance metrics disclosed under the company’s incentive plans. Ask whether the error, if classified at a higher severity level, would have altered the calculation of incentive-based compensation. If the answer is yes—or if it is not possible to determine the answer from public disclosures alone—the company’s materiality judgment merits skepticism.
Sixth, pay particular attention to companies with high ratios of incentive-based compensation to total compensation. The greater the proportion of an executive’s total pay that is tied to financial reporting measures, the greater the personal financial incentive to classify errors in ways that avoid triggering clawback exposure. Companies where performance-based equity and cash incentives represent 70 percent or more of CEO total compensation—common among large-cap companies—are structurally more susceptible to materiality distortion than companies with primarily salary-based compensation.
The SEC’s April 2025 Compliance and Disclosure Interpretations addressed some of the confusion surrounding the error correction checkboxes but did not address the deeper structural problem: the incentive to classify errors below the little r threshold entirely.[¹] The Commission’s enforcement posture under Chairman Paul Atkins has emphasized traditional accounting fraud and material misrepresentation—priorities that are welcome but that, by their nature, focus on errors that have already been classified as material.[¹²]
The gap between the SEC’s enforcement focus and the emerging materiality distortion risk is significant. Enforcement actions target companies that committed fraud or made material misstatements. The clawback-driven materiality distortion problem, by contrast, involves companies that may be making technically defensible—but systematically biased—judgments about the significance of errors that, individually, fall below traditional materiality thresholds. This is not fraud in the traditional sense. It is a structural incentive problem embedded in the interaction between two well-intentioned regulatory frameworks: the GAAP materiality standard and the Dodd-Frank clawback mandate.
The PCAOB’s inspection process offers a potential check, as inspectors can evaluate whether auditors are applying appropriate skepticism to management’s materiality analyses. But as we have discussed in prior Insights, the PCAOB’s own institutional future and inspection capacity face pressures that may constrain its ability to focus on this specific issue with the intensity it deserves.[¹³]
For the foreseeable future, the primary line of defense against clawback-driven materiality distortion is the institutional investor—armed with the analytical tools to identify when error classifications may be influenced by factors that have nothing to do with the economic significance of the error and everything to do with the compensation consequences of acknowledging it.
The Dodd-Frank clawback rules represent one of the most significant structural reforms in executive compensation governance in a generation. Their objective—to ensure that executives do not retain compensation earned on the basis of misstated financial results—is sound, necessary, and long overdue. But like all regulatory interventions that alter economic incentives, the rules have produced unintended consequences that the market is only beginning to understand.
The most important of those consequences is the pressure the rules place on the materiality judgment—the single most consequential determination in the error correction process and the one that separates visible accountability from invisible correction. When the personal compensation of the executives making that determination is directly affected by its outcome, the integrity of the judgment is structurally compromised, regardless of the good faith of the individuals involved.
For institutional investors, the implication is clear: the declining frequency of Big R restatements over the past two decades is not, on its own, evidence that financial reporting quality has improved. It may also reflect a systematic migration of errors to lower classification tiers—a migration that the new clawback rules have intensified rather than arrested. The forensic investor’s task is to look past the declining restatement count and ask a harder question: not how many errors were restated, but how many were quietly corrected without anyone outside the company ever knowing they existed.
The errors that companies acknowledge are the ones the system was designed to catch. The errors that disappear into Tier Three are the ones that institutional investors must learn to find for themselves.
Get the latest insights delivered to your inbox.
Referenced Sources
[1] Usvyatsky, O., “SEC Compensation Recovery Rule: Restatements and Related Clawbacks, Quarterly Update #1,” Deep Quarry (June 18, 2025), citing analysis of Q1 2024 and Q1 2025 10-K filings and SEC Compliance and Disclosure Interpretations issued April 2025.
[2] Financial Accounting Standards Board, Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections; BDO, “Financial Reporting Guide for Accounting Changes and Error Corrections” (September 2024).
[3] BDO, “Financial Reporting Guide for Accounting Changes and Error Corrections” (September 2024) (noting that “[p]reviously issued Form 10-Ks and 10-Qs are not amended for Little r restatements” and “the auditor’s opinion is generally not revised to include an explanatory paragraph”); Perkins Coie LLP, “Final Clawback Rules Adopted by the SEC” (2022).
[4] Securities and Exchange Commission, Rule 10D-1 Adopting Release (October 26, 2022), confirming that out-of-period adjustments—where the error is immaterial to both prior and current periods—do not constitute accounting restatements triggering recovery analysis; Arnold & Porter, “SEC Adopts Final Rules on Executive Compensation Clawbacks” (November 2022).
[5] Mintz LLP, “SEC Adopts New Incentive-Based Compensation ‘Clawback’ Rule” (November 2022), noting the SEC received comments expressing concern that clawbacks would apply to immaterial restatements and the SEC’s response that “both types of restatements address material noncompliance”; White & Case LLP, “SEC (Finally) Adopts Clawback Rules” (2022).
[6] Ideagen Audit Analytics, 2024 Financial Restatements Report (June 2025), as reported in TheCorporateCounsel.net, “Restatements: Non-Accelerated Filers Lead the Pack” (June 2025).
[7] Ideagen Audit Analytics, 2019 Financial Restatements Review (2020) (noting little r revisions constituted approximately 80 percent of all restatements in 2019, the highest percentage since 2005).
[8] Skurka, K., “Error Corrections: A Look at Adjustments and Restatement Trends,” Audit Analytics Blog (January 11, 2019), analyzing data through 2017 and documenting the inverse relationship between declining Big R restatements and rising out-of-period adjustments, with the latter peaking at 330 in 2016.
[9] Securities and Exchange Commission, Staff Accounting Bulletin No. 99, Materiality (August 1999), establishing that quantitatively small misstatements may be qualitatively material and identifying, among other factors, “whether the misstatement has the effect of increasing management’s compensation—for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation.”
[10] Securities and Exchange Commission, Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (September 13, 2006).
[11] Munter, P., SEC Acting Chief Accountant, “Assessing Materiality: Focusing on the Reasonable Investor When Evaluating Errors,” Statement of the Office of the Chief Accountant (March 9, 2022), available at sec.gov; see also Grant Thornton, “SEC Staff Issues Statement on Assessing Materiality” (March 2022).
[12] Bednar, T., Solomon, M.C. & McGuire, K., “The Shifting SEC Enforcement Landscape: 2025 Year-in-Review,” Cleary Gottlieb (January 2026) (noting that the SEC “is expected to continue prioritizing enforcement actions focused on insider trading, accounting and disclosure fraud, offering fraud, Ponzi schemes, market manipulation and breaches of fiduciary duties”); see also Fischman, H., Reisner, L. & Carey, J., “SEC Enforcement: 2025 Year in Review,” Paul, Weiss (January 21, 2026), published on Harvard Law School Forum on Corporate Governance.
[13] Buxton Helmsley, “Who Watches the Watchmen? The Fight Over America’s Audit Oversight—and Why Investors Should Be Paying Attention,” Insights (February 15, 2026).
This article is published by Buxton Helmsley USA, Inc. for informational and educational purposes only. It does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. The views expressed are those of Buxton Helmsley and are based on publicly available information as of the date of publication. Investors should conduct their own due diligence and consult with qualified professionals before making investment decisions.
Insights and updates delivered directly to your inbox.