In September 2002, the SEC opened an informal investigation into the retirement packages General Electric had offered to former CEO Jack Welch, who retired in 2001. 7 The compensation package, negotiated in 1996, became public information as a result of divorce proceedings between Welch and his wife, Jane. Her divorce filings reported an “extraordinary” lifestyle, largely paid for by GE funds, even after Jack’s retirement in 2001. 8
The divorce filing reported that GE had paid for country club memberships; family phones and computers in five homes; flowers; wine and maid service; sports tickets to the Red Sox, Yankees, and Knicks games; Wimbledon tickets; and opera tickets in addition to expenses for autos, many of the costs of a GE-owned apartment in New York City (valued at $80,000 per month), and the use of GE-owned jets valued at $291,865 per month.
SEC regulations require companies to disclose such benefit contracts but do not specify the nature of the disclosure. SEC regulations require companies to disclose the compensation to the five highest paid executives but do not require companies to disclose the amount paid to retired executives. GE said that the board had approved Welch’s retirement package in 1996. The company included a copy of the agreement in its 1996 proxy filing. The contract, according to the GE report, stated that Welch would have access for the remainder of his life to company services provided to him prior to retirement, “including access to company aircraft, cars, office, apartments and financial-planning services” plus reimbursement for “reasonable” travel and living expenses. 9
The SEC requested information from GE regarding the disclosure to shareholders and the public for the executive perks given to Welch. He insisted that all benefits had been disclosed but also said that he would give up most of the perks and begin paying GE $2 to $2.5 million per year for the use of the company’s apartment and planes. Welch said he would give up the perks, even though he thought they were reasonable at the time of negotiation, to avoid misperception in the current environment of corporate scandal.
a. Management and the auditors are required to identify the company’s significant accounts and disclosures. Would you identify the disclosure of the retirement package to be a significant disclosure for the company? What internal controls would you expect to be in place regarding the disclosure?
b. Is it the auditor’s job regarding the CEO’s benefits package to determine whether the compensation package is reasonable? Is it the auditor’s job to determine how the compensation package should be disclosed?