The PCAOB has proposed a new auditing standard for related parties that would result in discussions between compensation committees, compensation consultants and auditors for the company. The new standard would require auditors to obtain an understanding of a company’s executive compensation practices “sufficient to identify risks of material misstatements.” The motivation of the PCAOB is sufficiently explained by the proposing release mentioning Enron and Tyco in the first paragraph about the reasons for the new standard.
One of the new steps to evaluate the potential risks of executive compensation is a requirement that the auditor “consider” talking to the chair of the compensation committee and to any compensation consultants for the compensation committee or the company. Given the tone of the PCAOB release, it seems likely that most auditors will move from consideration to talking very quickly and that both the compensation committee chair and the compensation consultants will be on the list.
These standards are scheduled to be implemented for audits of fiscal years beginning on or after December 15, 2012. If the standards are adopted, companies may want to give the compensation committee chair an extended briefing on the executive compensation risk assessments done by the company. Increasing the budget for compensation consultants also would be in the cards.