Remediation of Material Weaknesses Related to Employee Compensation

Summary

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Despite the passage of the Sarbanes-Oxley Act (SOX), public companies have continued to experience accounting and control issues related to employee compensation. Beyond the stock option backdating scandal, other companies have experienced problems accounting for other types of compensation, including bonus plans. The authors examined 124 companies with material weaknesses in internal control related to employee compensation. Also included is an analysis of the companies' responses to their internal control problems. The analysis sheds insight into the steps companies have taken to recover from accounting and control problems related to employee compensation, as well as the role of the board and its committees in preventing and remediating such weaknesses. The authors encourage CPAs to help public companies ensure that they have appropriate controls in place to promote reliable reporting of employee compensation -- before they face adverse internal control opinions or restatements.

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Extract

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Remediation of Material Weaknesses Related to Employee Compensation

Despite the passage of the SarbanesOxley Act (SOX), public companies have continued to experience accounting and control issues related to employee compensation. The backdating of stock options has emerged as a major employee compensation scandal. Professors Randall Heron and Erik lie have estimated that over 2,000 companies improperly backdated stock options from 1996 to 2005. (See www.biz.dowaedu^culty/elie/backdatinght m for an overview of the backdating scandal.)

According to CFO magazine, as of November 2007, nearly 120 companies faced SEC investigations related to option backdating. In addition, the scandal has spawned investigations by the IRS, the U.S. Attorneys' Office, and Congress, and has resulted in detailed guidance from the S...

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