From the April/May 2012 issue of Treasury & Risk magazine

Audit Eye on Exec Pay

Accounting regulators want auditors to look more closely at compensation agreements as a source of risk.

Is a proposed audit standard on related-party transactions from the Public Company Accounting Oversight Board (PCAOB) mission creep, or just a pointed reminder to auditors to pay attention to the potentially corrupting role of executive compensation arrangements? In putting forward the new standard in February, the board noted studies showing that one-quarter of its disciplinary actions cite auditor failure with respect to related-party issues, including significant unusual transac tions, and that 90% of fraudulent financial reporting cases brought by the Securities and Exchange Commission involve top executives. The proposed standard requires auditors to look for ways pay agreements might lead to excessive risk-taking or actions designed to benefit an executive at the expense of shareholders.

“This proposal would amend existing standards to require auditors to perform procedures to obtain an understanding of the company’s financial relationships with its executive officers,” Steven Harris, a member of the PCAOB, said in a meeting.

Quaadman calls the proposal “mission creep” and says it’s “part of a systematic move by the PCAOB to overstep its role” and “assert its authority over executive compensation.”

Greg Scates, deputy chief auditor at the PCAOB, disputes this. “The chamber is painting a false picture that the auditors will be giving an opinion on compensation,” Scates says. “That’s wrong. That’s the role of the compensation committee. We’re just saying to auditors, ‘Look at the incentives in the compensation. See if they pose a risk.’ They need to document what those risks are.

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