Accounting & Tax

AFL-CIO Offers Big Four Advice on Backdating Abuse

The AFL-CIO tells accounting firms it is watching to see whether they are doing enough to catch options backdating.
Kate PlourdAugust 27, 2007

Concerned that the recent epidemic of stock option abuses at U.S. corporations is far from over, the AFL-CIO sent letters of advice to the Big Four accounting firms in hopes that they can help prevent future wrongdoings.

In the letters, sent last Friday to Ernst & Young, Deloitte & Touche, PricewaterhouseCoopers, and KPMG, AFL-CIO secretary treasurer Richard Trumka said the trade union’s concern grew out of the effect that stock options abuse has had on American families and the union members participating in pension and retirement funds with more than $5 trillion in assets at risk.

“We want to make sure the auditors know what their responsibility is and that we’ll be watching,” Vineeta Anand, chief research analyst at the AFL-CIO office of investment told CFO.com.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

One such responsibility, highlighted in the letters, was that accounting firms are required to detect material misstatements caused by fraud and comply with guidance issued by the Securities and Exchange Commission and Public Company Accounting Oversight Board.

The letters also stated that auditor access to senior management and the board of directors needs to be expanded, and recommended a number of steps auditors could take to safeguard the value of investments and “be more effective” in ensuring that companies disclose any misconduct.

The letter says that in order to prevent abuses, auditors must understand the process boards of directors use to grant equity awards, such as stock options, and the internal controls that oversee the process. Auditors must also verify with the compensation committee that stock option grants were actually approved as reported, and thoroughly examine legal documents and minutes from board and compensation committee meetings.

Recent stories in the news regarding auditor awareness drew the AFL-CIO to bring up its concerns about the issue, according to Anand. After meeting last spring with the four accounting firms, Annand said, it was clear that the issue was not going away and the AFL-CIO speculates that the 140 companies currently under investigation for backdating and spring-loading are just the tip of the iceberg.

“We believe there are several hundred, if not thousands, that were involved and we don’t think we’ve seen the last of it,” Anand said.

A spokesman from PricewaterhouseCoopers said he had not seen the letter at press time. A KPMG spokesperson said it had received the letter and is currently reviewing it. Representatives of Ernst & Young and Deloitte & Touche could not immediately be reached for comment.