The PCAOB is now setting its sights on executive compensation, issuing a release Tuesday proposing that auditors consider how management incentives might influence accounting decisions.
“[S]ome studies suggest that executive officers with equity-based compensation packages have, in the past, influenced earnings to inflate the value of their compensation,” PCAOB Board Member Steven Harris said Tuesday at PCAOB's open meeting. He cited a 2010 study from the Committee of Sponsoring Organizations, which found the CEO or CFO were involved in 89% of the SEC’s financial reporting frauds from 1997 to 2008.
The PCAOB is especially concerned about related-party transactions with senior executives because of the role they played in Enron’s collapse.
The proposal would require auditors examine the financial relationship and transactions with executives, including:
- Employment contracts
- Proxy statements
- Reimbursement arrangements
- Changes to incentive plans
- Special bonuses
Critics argue such examinations are outside auditors’ expertise. The proposal would also call on auditors to examine relationships and transactions with other parties beyond executives. For more details see the story from Accounting Today.
The PCAOB said it will leave the proposal open for public comment until May 15.