Costs and Benefits and Audit Procedures in Detecting Abuse or Fraud

In a response to the following post, state whether you agree or disagree with the costs and benefits provided. What other costs or benefits do you think are associated with this type of compensation? What additional audit procedures do you think are most effective in detecting abuse or fraud related to executive compensation?

The company I research is Berkshire Hathaway which is a large conglomerate holding company, but their main business and source of capital is insurance. Warren E. Buffett is the CEO of the company for over the past 50 years. Reviewing the Proxy Statement of May 6, 2023, Mr. Buffett’s annual salary is $100,000. This amount has remained the same for the past 25 years. In addition, for the year 2022 Mr. Buffett was compensated with security for his home in the amount of $301,589 for a total compensation amount of $401,589 in 2022, and he does not receive bonuses. The Proxy Statement also gives the median employee compensation of $62,691 for 2022, which is a ratio of 6.41:1. In this scenario Mr. Buffett is underpaid when compared to other executives like Ajit Jain, Vice Chairman- Insurance Operations with a total compensation for 2022 of $19,015,250, a 47.35:1 ratio of Mr. Buffett’s compensation. I believe Mr. Buffett is underpaid for a CEO position of as large of a company as Berkshire Hathaway. There are many responsibilities that fall onto the CEO and affirmations to the reporting of financial statements of the company. For Mr. Jain the ratio of compensation to the median employee is 303.32: 1 and part of his compensation includes a $3 million bonus. Mr. Jain’s ratio is excessive in my opinion compared to the median employee and to Mr. Buffett’s compensation. Executives are worth higher compensation for the growth and success of the company, but I do believe this amount can be excessive.

Compensating executives with stock options is a good way to minimize immediate cost to the company and allows executives to have ownership of the company they belong to. With stock options executives would be motivated to increase profits to increase their share value. On the other hand, this can cause fraud if the executives decide to overstate income, so they do not lose price per share on their stock.

To identify if there is any executive compensation abuse or fraud, the auditor would need to perform risk assessment procedures and test internal controls in relation to the revenue process. Performing risk assessment requires the auditor to have an understanding of the company and its environment, understand internal controls, audit planning and conducting discussions with engagement team and management (PCAOB, 2010). Internal controls need to be determined with regard to separation of duties to determine if anyone has too much access over several departments in the revenue cycle (Messier, 2022). Testing the revenue cycle could show any inflation in sales, inconsistencies, and false documentation or no documentation.