Executive compensation is a frequent topic in the media today. From an auditor’s perspective, executive compensation is an important consideration when it is time to develop the audit plan and audit strategy. If earnings and revenue are tied to compensation, then there is a risk of manipulation.
Search the internet for information on labor costs in the retail catalog industry (for example, labor costs as a percentage of sales).
Executive compensation ballooned in the 1990s with notable compensation abuses. The most popular form of executive compensation in the 1990s was company stock (or options to purchase stock). Designers of these compensation plans argue that by compensating officers with stock, the officers would take actions in the best interest of the shareholders. Critics claim that executive compensation is often too high in proportion to average salaries at companies, and that the compensation levels motivate officers to take selfish actions.
- Research executive compensation of a well-known publicly traded company. You can find executive compensation in SEC filings on EDGAR at www.sec.gov or on other sites, such as Executive Paywatch. Use your best judgment to compute the proportion of executive compensation to average employee salary. (For example, are executives earning five times, or 10 times, or 100 times the average employee?) Provide links to the data used to calculate the proportion of executive compensation. In your opinion, are the executives worth it?
- In your opinion, what are the costs and benefits associated with compensating executives with stock or the option to purchase stock?
- What do you believe are the most effective audit procedures to use to identify executive compensation abuse or fraud? Support your opinions and recommended audit procedures with at least one scholarly.