August 8, 2014

Expense Policies: New Auditor Scrutiny

The PCAOB’s recent amendments to Auditing Standard No. 12 addressing financial relationships and transactions with the company’s executive officers (which Broc blogged about here) have not received much attention in view of the concurrent adoption of Auditing Standard No. 18 concerning Related Party Transactions. However, it’s worth specifically noting that amended Auditing Standard No. 12 requires auditors to obtain an understanding of the company’s policies & procedures for authorization and approval of executive officer expense reimbursements – an area that is often ripe for criticism and improvement. Even in the absence of conduct in this area that would appear to pose a risk of material misstatement based on a point-in-time review, a company’s executive expense approval process, as evidenced by the documentation (not just the paper policy, which may differ), reveals a lot about its corporate culture and tone at the top – which influence pretty much everything else.

One great way to see if your current process is working effectively and to have support vis a vis management for updating your policies & procedures is to have your Internal Audit department (assuming functional reporting to the audit committee) or an external audit consultant (if you lack resources in-house, or an independent internal audit of this area isn’t feasible under the circumstances) conduct an executive expense audit and make recommendations to management and the audit committee based on those results.  Having once gone the latter route while serving as GC & Secretary, I highly recommend it – as this is one of those times when it makes sense to obtain a view from an outside consultant who is experienced in internal auditing, knowledgeable of mulitiple companies’ expense controls and internal controls generally, and has no ties with company management.

We have posted lots of memos about these new and amended PCAOB standards here in our “Related Party Transactions” Practice Area.

Is There a “Proper” CEO Expense Approval Process?

Perhaps prompted by the amendments to Auditing Standard No. 12, the “proper” approach to CEO expense approvals was recently bantered about on Proformative, an online resource primarily geared toward finance professionals – but often also of interest from a legal perspective. A member anonymously questioned on the site’s Q&A forum who should approve CEO travel expense reimbursements – the board or the CFO? He noted that many boards meet just monthly, which could make timely board approval difficult – but that the CFO of his company had not properly vetted senior management expenses in the past.

I thought this was a great question and, while I couldn’t resist contributing my own views based on past experience, I imagine there are multiple, sound approaches to the CEO expense approval process. My own view is that – outside of expenses that fall within objective, pre-established standards that apply to all executives in terms of dollar amounts and expense types such that the CFO (or whoever else internally is charged with expense approvals) isn’t capable of being pressured (directly or indirectly) to approve potentially questionable expenses – a formal process should be established so that the audit committee chair, independent lead director or board chair (or other designated independent director) reviews & approves the expenses. This is because – realistically, CFOs – or other subordinates of the CEO – often are not in a position to deny approval, ask probing questions about expenses that appear questionable or even demand additional supporting documentation.

Other views communicated by members in the forum were generally comparable – i.e., charge the CFO with approval of routine expenses as specifically defined by pre-established parameters via a written policy, and charge the audit committee or other independent directors with approval for any expenses that fall outside of those parameters. However, one company President/co-founder indicated that getting the board involved in this type of activity – even if just for the CEO – is difficult barring some evidence of problems that would trigger more robust board oversight. Unfortunately, based on my own experience, I think that that is what often occurs – a real problem that ultimately prompts intense board focus and development of a new process that includes some sort of board oversight as a component. It would seem like the more conservative, “safer” approach is to build that board oversight into the process in the first instance – recognizing the inherent difficulty in charging a subordinate with approval responsibility for outside-the-norm expenses. That said, I would be very interested in hearing others’ views on this if anyone is willing to share theirs.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Study: Board Oversight of Sustainability
– Board Committee Structures Logically Circumstances-Driven
– Climate Change Disclosure: Heads I Win, Tails You Lose?
– Hut, Hut, Hike! First Fantex IPO in NFL Player
– Insider Trading: Big “Downstream Tippee” Case Might Change Standard


– by Randi Val Morrison