Executive compensation ballooned in the 1990s, and as highlighted in Exhibit 12-1, there were notable compensation abuses. The most popu- lar form of executive compensation in the 1990s was company stock (or options to purchase stock). Designers of these compensation plans argue that by compensating officers with stock, the officers will take actions in the best interest of the shareholders. Critics claim executive compen- sation is often too high in proportion to average salaries at companies and that the compensation levels motivate officers to take selfish actions. Required:

a. Research executive compensation of some well-known companies. (You can find executive compensation in SEC filings on EDGAR at www.sec.gov or on a variety of Internet sites, such as eComp at www.ecomponline.com.) Use your best judgment to compute the pro- portion of executive compensation to average salary (i.e., are execu- tives earning 5 times, or 10 times, or 100 times the average employee). In your opinion, are the executives worth it?

b. In your opinion, what are the costs and benefits associated with com- pensating executives with stock or options to purchase stock?

c. What do you believe are the most effective audit procedures to use to test for executive compensation abuse or fraud? Please explain why. p-968