Financial Accounting Blog

Sunday, September 28, 2003

This article from Forbes is from late July of this year, but it raises a pretty good point about corporate governance and the way accounting is used to determine executive compensation. In Chapter 5, the text dicusses how changes in operating parameters can change the values of performance ratios. Some of those changes can have a negative impact on the long term performance of the company. But in passing this seems to imply another point, which is that basing executive compensation on these ratios can reward executives for making changes in accounting procedures without making any real change to the performance of the company at all.

Still, the officials made it clear that the process of corporate reform, including last year's legislation and the establishment of the Oversight Board, is far from over. While both the Senate and House are preparing oversight hearings in the fall on implementation of Sarbanes-Oxley, they want to let regulatory changes filter through the system before instituting further changes.

"It's too early to pass definitive judgment," said Sarbanes.

In response to a question about creating guidelines for executive compensation, which are not spelled out in the law, Donaldson said increased independence will require boards to assess "exactly what they are compensating for."

"They'd fallen into the trap of looking at simple financial measures," Donaldson said. "Now there's real examination of what it is we're measuring."