* Execs involved in 89 pct of reporting fraud
* Proposal would increase auditors' scrutiny of pay
* Related-party dealings might get closer look
By Dena Aubin
Feb 28 Auditors of U.S. companies would
have to look harder at executive pay and at accounting maneuvers
used to dress up financial results under a revised standard
proposed on Tuesday by the watchdog for the audit industry.
The proposal from the Public Company Accounting Oversight
Board would require auditors to read compensation contracts and
look for any incentives that might encourage executives to
Many executives are paid in stock options that rise in value
with a company's shares, a type of compensation that critics say
encourages earnings management.
Senior executives were involved in 89 percent of financial
reporting fraud cases brought by the U.S. Securities and
Exchange Commission between 1997 and 2008, according to an
academic study cited by PCAOB board member Steven Harris.
"Among the most commonly cited motivations for financial
reporting fraud was the desire to increase management
compensation based on financial results," Harris said at the
group's meeting on Tuesday.
The proposal also calls for auditors to delve deeper into
"significant unusual transactions" and companies' dealings with
related parties such as key shareholders or family members.
The PCAOB is accepting public comments on the proposals
until May 15.
The PCAOB has been warning auditors to pay more attention to
unusual transactions since Lehman Brothers Holdings Inc
was accused of using complex deals to move as much as
$50 billion off its balance sheet at quarter ends. The maneuvers
hid leverage at the investment bank before its 2008 bankruptcy.
In related-party abuses, executives in a company structure
transactions to benefit themselves or relatives at the expense
of shareholders. Buying materials or services from a company
partly owned by an executive or his family is one type of such
Financial frauds at Enron, Tyco and Refco all involved
Auditors should already be looking for related-party
dealings, but the PCAOB's inspections and enforcement actions
have shown there is considerable room for improvement, board
member Dan Goelzer said.
The proposals would amend existing standards to strengthen
auditors' duties in checking related-party and unusual
Under the proposed rules, auditors would also have to tell
board audit committees when they find related-party dealings
that were not properly disclosed or authorized.
"In many cases, the sorts of abuses these proposals address
are evidence of both a financial reporting break-down and a
corporate governance break-down," Goelzer said. "The board of
directors needs to be promptly armed with information so that it
can take appropriate action."