Stock Based Compensation Audit Techniques Guide (02-2005)
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NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Stock-based compensation generally consists of either the transferring of stock or the issuance of stock options to an employee or independent contractor.
Generally, one place to start the audit is by reviewing the Securities and Exchange Commission (SEC) Form 10-K, Annual Report, including items 10, 11,
and 12, to identify the 16b executives, as well as the Board of Directors, who may have received stock-based compensation. This report can be downloaded from the SEC website at www.sec.gov.; go to Filings and Forms, Search for Company Filings, then type in the name of the company to be researched.
Although there are numerous documents filed with the SEC, the pertinent documents for compensation purposes are the 10-K, Def 14A, Other Definitive Proxy Statements, the Form 4, Statement of Changes in Beneficial Ownership, and the actual employment contracts for the 16b executives.
Once you’ve identified the 16b executives and the stock-based compensation arrangements, you will want to determine whether all compensation related to these various plans has been included in income (reported on the executive’s W-2) and the appropriate employment taxes have been assessed. If the compensation awarded to the 16b executives has not been properly recognized, the audit scope may need to be expanded to other executives accordingly.
SEC DOCUMENTS:
The 10-K document is the annual report filed with the SEC and provides a complete listing of the Directors and executive officers, executive compensation, and the security ownership of certain beneficial owners and management. There is also a description at the back of the 10-K containing additional exhibits filed with the SEC which may contain additional compensation plans for executives.
Generally, these compensation plans include stock options and restricted stock and may discuss vesting of the options, especially if there is a change in control (i.e., a merger or buyout of the company).
The 14A, Proxy Statement Pursuant to Section 14A of the SEC, better known as the Definitive Proxy Statement, is sent to the shareholders of record prior to the Annual Meeting and contains information about specific stock options and compensation plans for the executives. It is more detailed than the 10-K and provides specific detail as to the number of options granted and the total exercise price.
Form 4 provides information about the disposition of stock either by sale or transfer. This information may indicate whether the shares have been transferred to a family partnership or other entity controlled by the shareholders, officers, and/or Directors.
The employment contracts contain additional information on the types of compensation awarded to employees including the right to participate in specific stock-based compensation such as the grant of options, phantom stock, stock appreciation rights, and restricted stock. The information may be repetitive if you have read the prior documents first; howe ver, there may be new information relating to compensation in the employment agreements.
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