Auditing and Assurance Services 9th Edition by Alvin Arens,Mark Beasley,Randy Elder

Exercise 2

Executive compensation ballooned in the 1990s, and as highlighted in Exhibit 12-1, there were 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 will take actions in the best interest of the shareholders. Critics claim executive compensation is often too high in proportion to average salaries at companies and that the compensation levels motivate officers to take selfish actions.
Required:
a. Research executive compensation of some well-known companies. (You can find executive compensation in SEC filings on EDGAR at www.sec.gov or on a variety of Internet sites, such as www.aflcio.org/corporate-watch, eComp at www.compensationresources.com.) Use your best judgment to compute the proportion of executive compensation to average salary (i.e., are executives earning 5 times, or 10 times, or 100 times the average employee). In your opinion, are the executives worth it?
b. In your opinion, what are the costs and benefits associated with compensating executives with stock or options to purchase stock?
c. What do you believe are the most effective audit procedures to use to identify executive compensation abuse or fraud? Please explain why.
EXHIBIT 12-1 Executive Compensation Abuses at Tyco