PCAOB Proposal's Impact on Executive Compensation

Public Companies

By Doug Morally

On February 28, the Public Company Accounting Oversight Board (PCAOB or Board) issued Release No. 2012-001, Proposed Auditing Standard - Related Parties, which would supersede the Board’s interim standard AU Section 334, Related Parties. The proposed standard also includes amendments to PCAOB auditing standards related to significant unusual transactions and other proposed amendments to PCAOB auditing standards.

The PCAOB indicated in the release that significant unusual transactions can create complex accounting and disclosure issues, and in some instances, have been used to engage in fraudulent activity. The PCAOB also suggested that incentives and pressures for executive officers to meet certain financial targets can be created by a company’s financial relationships and transactions with its executive officers. Due to these risks of fraudulent financial reporting, the PCAOB is proposing that auditors now take into consideration a company’s executive compensation practices during the audit process.

Auditors have always been responsible under PCAOB standards to understand executive compensation in accordance with PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement. The proposed amendment would require auditors to perform certain auditing procedures related to executive compensation in order to identify risks of material misstatement in the financial statements, including reading and understanding employment compensation contracts relating to members of an organization’s senior management, as well as contacting individuals involved in determining executive compensation such as the compensation committee chair, any outside compensation consultants and human resources personnel.

The comment period for this proposed amendment ends on May 15, 2012, and the PCAOB anticipates that the changes would be effective for fiscal years beginning on or after December 15, 2012. 

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