The Sarbanes–Oxley Act of 2002 (SOX; U.S. House of Representatives 2002) was enacted as a direct response to the high-profle frauds and corresponding audit failures that occurred in the early 2000s (e.g., Enron, WorldCom). The intent of the legislation is to hold both company executives and fnancial statement auditors more accountable for their actions and thereby improve the material accuracy of publicly traded companies’ fnancial statements. Of particular interest to this study, SOX Section ۳۰۴ includes a clawback provision that requires executives to pay back incentive compensation earned on fnancial reporting metrics that subsequently are restated. More recently, the Dodd-Frank Act of 2010 (Dodd-Frank) strengthened such clawback provisions. This study’s objective is to provide theory and evidence (both experimental and qualitative) to indicate how clawbacks infuence auditors’ ethical judgment and decision-making. Although the intent of clawbacks is to foster high-quality fnancial reporting by creating a culture of ethical behavior (SEC 2010), Pyzoha (2015) fnds evidence that clawbacks can decrease ethical behavior by increasing management opposition to restatements when they are at risk of losing incentive-based compensation. Specifcally, Pyzoha (2015) reports that managers are more likely to oppose a restatement when they have relatively high incentive-based compensation at risk and the auditor is of relatively low quality. Thus, while reductions in restatements in a clawback environment may be due to enhanced honesty, such reductions might also be due to unethical behavior by managers attempting to retain incentive-based compensation. Beyond the compromised ethics of management, the auditor independence literature suggests that auditors might be less likely to propose restatements to avoid upsetting management in the presence of a clawback policy. The efect of clawbacks on auditors’ restatement recommendations is of particular interest due to these strong ethical implications and the fact that restatements often result in adverse economic consequences for investors, creditors and other fnancial statement users, company directors, management and other employees, and auditors (Palmrose et al. 2004). Leveraging psychology theory on motivated reasoning (cf. Kunda 1990), and prior accounting research on auditor independence, we predict that auditors will be less likely to propose restatements in the presence of a clawback policy (i.e., they will exhibit less ethical behavior). Previous research demonstrates that auditors exploit ambiguity in fnancial reporting standards to make judgments consistent with managements’ preferred conclusions (Hackenbrack and Nelson 1996; Kadous et al. 2003). Thus, when evaluating an ambiguous potential restatement, we expect that the presence of a clawback will amplify the efects of motivated reasoning, making auditors less likely to conclude a restatement is necessary to avoid upsetting management by triggering the clawback. Further, we examine whether these predicted efects are amplifed when auditor independence is threatened (i.e., when client importance is relatively high) as auditor incentives to appease management are strengthened.