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item(s) of disclosure. Nonmonetary forms of remuneration must be valued as accu-
rately as possible. The appropriate valuation may be based upon appraisals, the value
of the benefit to the recipient, the valuation assigned for tax purposes, or some other
appropriate standard.

Although the SEC release attempted to resolve the disclosure problem of
perquisites, many accounting practitioners and corporate executives raised ques-
tions regarding the disclosure of certain items. In an attempt to resolve the issues,
the SEC issued a second Interpretive Release, No. 33-5904, which contained
360 Reviewing Certain General Business Practices

questions and interpretative responses of the Commission™s Division of Corpora-
tion Finance. In particular, the questions related to (a) the use of company prop-
erty; (b) membership in clubs and professional associations; (c) medical, insurance,
and other reimbursement plans; (d) payments for living and related expenses; (e)
use of corporate staff; (f) benefits from third parties; (g) company products; and
(h) business expenses. Specifically, the Commission asserted40:

Corporations make a great variety of expenditures which relate to management,
many of which result in benefits to executives. Whether these constitute remunera-
tion usually depends upon the facts and circumstances involved in each situation. In
general, expenditures which simply assist an executive in doing his job effectively or
which reimburse him for expenses incurred in the performance of his functions are
not remuneration, while expenditures made for his personal benefit or for purposes
unrelated to the business of the company would constitute remuneration. In some in-
stances, expenditures may serve both purposes, and if neither is predominant, allo-
cation to the extent reasonably feasible may be called for.
In determining whether the value of specific benefits should be included in aggregate
remuneration, registrants should keep in mind that full disclosure of the remunera-
tion received by officers and directors is important to informed voting and invest-
ment decisions. In particular, remuneration information is necessary for an informed
assessment of management and is significant in maintaining public confidence in the
corporate system. Of course, accurate and sufficiently detailed books and records are
prerequisites to the appropriate disclosure of remuneration information.41

Of particular importance to the audit committee is SEC Release No. 33-6003,
issued in December 1978 to amend Regulation S-K. This release affects not only
item 4 of the S-K but also proxy materials and other filing forms. For example, this
release increases all remuneration paid to or accrued by the corporation™s five
highest-paid officers or directors whose total remuneration exceeds $50,000
As mentioned in Chapter 3, in October 1992 the SEC adopted amendments to
the executive officer and director compensation disclosure requirements. With re-
spect to perquisites, Release Nos. 33-6962, 34-31327, and 1C-19032 pertaining to
Regulation S-K set forth:

Perquisites. Several commenters suggested that, to reflect inflation, the perquisites
and other personal benefits reporting threshold should be raised from the lesser of
$25,000 or 10% of reported salary and bonus, and that the requirement to itemize
each perquisite or benefit in a footnote be eliminated. Given the effect of inflation

In addition to the SEC releases cited, the reader should review Release No. 33-5950, “Proposed
Amendments to Disclosure Forms Regulations” (July 1978) with the independent auditors.
Although the SEC has stated that perquisites of less than $10,000 per individual may be excluded in
the aggregate renumeration, such exclusion should be disclosed in the registrant™s transmittal letter.
As of October 21, 1992, this amount was increased to $100,000, as discussed in Chapter 3. For fur-
ther reference, see Kathleen T. McGahran, “SEC Disclosure Regulation and Management
Perquisites,” The Accounting Review 63, No. 1 (January 1988), pp. 23“41; and Coopers & Lybrand,
“Executive Perquisites Study Release: An Overview of the Findings,” Executive Briefing (May 1992),
pp. 1“3.
Corporate Perquisites 361

since the last revision of Item 402 in 1983, which has been taken into account in the
Commission™s upward adjustment of the dollar benchmark for designating the
named executives, the Commission similarly has increased the perks/personal bene-
fits threshold in the final rule to call for disclosure only when the aggregate value of
these items exceeds the lesser of either $50,000 or 10% of total salary and bonus dis-
closed in the Summary Compensation Table.
As proposed, the registrant would have been required to identify each perquisite in-
cluded in the amount reported in a footnote to the Other Annual Compensation col-
umn. The Item has been revised to require footnote or textual narrative disclosure of
the nature and value of any particular perquisite or benefit only for those perks val-
ued at more than 25% of the sum of all perquisites reported as Other Annual Com-
pensation for that executive.43

In view of these new disclosure requirements in the company™s annual proxy
statement, the audit committee should ascertain that the compensation committee
and management are complying with the compensation and perquisite disclosure
requirement. Such information should be reviewed by general counsel and the in-
dependent auditors.

Summary Guidelines
In monitoring corporate perquisites, the audit committee should give consideration
to these three matters.

1. All perquisites should be formally approved by the board of directors as rec-
ommended by the compensation or audit committee. Such approval should be
duly noted in the minutes of the board™s meetings and the committee™s meet-
2. The perquisites should be clearly defined in view of the SEC releases regard-
ing the nature of such payments or reimbursements. As discussed in this chap-
ter, such SEC releases provide guidance to the auditors and management in
connection with the entity™s compliance with the securities laws. Such perks
should not be excessive or unusual in light of the rulings.
3. The committee should request a report from the internal auditors concerning
the status of the entity™s perquisites.44 In reviewing the audit report, the com-
mittee should obtain assurance in writing that the internal accounting and ad-
ministrative controls (discussed in Chapter 8) are effective. Also, the committee

Securities and Exchange Commission, “Executive Compensation Disclosure,” Federal Register 57,
No. 204 (October 21, 1992), p. 48131.
It may be advisable to retain the outside auditors to review the travel and entertainment expenses for
several of the senior executives each year. It is imperative that the company have an appropriate ap-
proval system of expense accounts. In its 1987 report, the National Commission on Fraudulent Finan-
cial Reporting recommended that “the committee should review in-house policies and procedures for
regular review of officers™ expenses and perquisites, including any use of corporate assets, inquire as
to the results of the review, and, if appropriate, review a summarization of the expenses and
perquisites of the period under review” (Washington, DC: National Commission on Fraudulent Finan-
cial Reporting, 1987), p. 180.
362 Reviewing Certain General Business Practices

should inquire about management™s method of valuation of personal benefits
and related tax consequences. Thus it is desirable to discuss the tax implica-
tions with the corporate tax specialist or outside tax advisor in order to coor-
dinate the income tax and SEC reporting requirements.

In addition to the usual practice of monitoring certain business practices, such as
compliance with the Foreign Corrupt Practices Act in regard to perquisites and
travel and entertainment, audit committees also may be requested by the board of
directors to review other business practices, such as corporate contributions, to en-
sure compliance with corporate policy.

Nature of Corporate Contributions
According to R. A. Schwartz, corporate contributions or philanthropy may be de-
fined as “a philanthropic transfer of wealth to be a one way flow of resources from
a donor to a donee, a flow voluntarily generated by the donor though based on no
expectation that a return flow, or economic quid pro quo, will reward the act.”45
Furthermore, as reported by C. Lowell Harriss:

The interests and kinds of involvement differ enormously from firm to firm, as do the
dollar outlays in corporate giving. Deductions on corporate tax returns of contribu-
tions have been rising, from $252 million in 1950 to $1,350 million in 1976. But
such contributions represent less than 1 percent of profits and less than 5 percent of
the community™s total philanthropy.46

Corporate contributions also consist of nonmonetary giving, which includes:

• Employees™ personal time in nonprofit activities
• Company property, such as the firm™s auditorium
• Loans at concessionary rates
Job training for the disadvantaged and disabled.47

As Harriss observes in a Conference Board study by James F. Harris and Anne
Klepper, “If a price tag were put on all such nonmonetary or indirect aid in 1974,
the estimate of corporate contributions would double (to well over $2 billion).”48

R. A. Schwartz, Corporate Philanthropic Contributions, Pamphlet 72 (New York: New York Univer-
sity, 1968), p. 480.
C. Lowell Harriss, “Corporate Giving: Rationale and Issues,” Two Essays on Corporate Philan-
thropy and Economic Education (Los Angeles: International Institute for Economic Research, Octo-
ber 1978), p. 2.
Ibid., p. 3.
See James F. Harris and Anne Klepper, “Corporate Philanthropic Public Service Activities” (New
York: The Conference Board, 1976).
Corporate Contributions 363

Business Week observed that “total corporate giving has remained flat at $6.1
billion since 1990.” Typically, “corporation donations are usually 1% to 2% of pre-
tax domestic income.” For example, more companies have developed a strategic
plan and target charities more directly related to their operations.49
Concerning the justification of corporate contributions, Schwartz notes that:

• Gifts that will enhance the public image of a corporation can advantageously
shift the demand curve for corporation™s product.
• The compatibility of corporate giving with monetary profit maximization is
further suggested by the benefits a firm can derive from “farming out” re-
search programs to educational institutions, while reaping both the gains of
subsequent technological advances and the beneficial publicity with the gift.50

Although the Foreign Corrupt Practices Act covers illegal contributions
abroad, it is also illegal to make political contribution through the use of corporate
funds in U.S. federal elections. As noted by Roderick M. Hills, former chairman
of the SEC: “The ˜chance™ of ˜Watergate™ gave us the opportunity for better gov-
ernment, and began a series of corporate investigations that already have improved
our vision and raised corporate behavioral standards.”51 Thus it is necessary “to
create an internal reporting system that will place these rather difficult payment
questions squarely before the independent directors, outside auditors, and outside

Summary Guidelines
Ferdinand K. Levy and Gloria M. Shatto summarize four evaluative principles re-
garding corporate contributions programs:

1. If the gift is not legal or if it is questionable, don™t make it.
2. The contribution should represent the corporation and should not be a per-
sonal gift or whim of one executive.
3. Contributions “in kind” or well specified are generally preferable to unre-
stricted gifts.
4. Each contribution should stand alone and be capable of being justified on the
basis of some type of cost-benefit analysis.53

Lois Therrien, “Corporate Generosity Is Greatly Depreciated,” Business Week (November 2, 1992),
pp. 118“120.
Schwartz, Corporate Philanthropic Contributions, p. 480. For further reference, see Harry L. Free-
man, “Corporate Strategic Philanthropy,” Vital Speeches 58, No. 8 (February 1, 1992), pp. 246“250;
Betty S. Coffee and Jia Wang, “Board Composition and Corporate Philanthropy,” Journal of Business
Ethics 11, No. 10 (October 1992), pp. 771“778.
Roderick M. Hills, “Views on How Corporations Should Behave,” Financial Executive 44, No. 11
(November 1976), p. 34.
Ibid., p. 32.
Ferdinand K. Levy and Gloria M. Shatto, “A Common Sense Approach to Corporate Corporations,”
Financial Executive 46, No. 8 (September 1978), p. 37.
364 Reviewing Certain General Business Practices

Moreover, “the entire corporate giving program . . . must be open to the public
and should be capable of both an internal and external audit.”54 Thus it is evident
that the audit committee should review the corporation™s policy concerning its con-
tributions and adhere to the monitoring practices discussed earlier in this chapter.
James A. Joseph notes that foundations need to:

• Clarify what is private and what is public;
• Reaffirm the moral authority of the traditional notion of public trust;
• Examine whether the enthusiasm with which foundations portray nonprofit vol-
untary activities as a distinctive sector may contribute to the tendency of critics
and supporters to overlook the diversity within that sector;
• Demonstrate to the public that responsible governance and efficient management
are all part of the public trust; and
• Reflect, retain, and reaffirm principles and practices that are fundamental to ef-
fectiveness in philanthropy.55

The following financial statement disclosure regarding this subject is presented
to inform the reader of management™s representations to the stockholders.

Schering-Plough”Through corporate giving, the Schering-Plough Foundation and
employee voluntarism”contributed much in 1992 to the communities where it op-
erates; to health care, educational and arts organizations; and to those in need. The
Foundation made grants totalling $2.8 million in 1992, complementing corporate
contributions of $1.9 million.56

Recent business and audit failures of major corporations highlight the need for the
audit committee to monitor and enforce a conflicts-of-interest policy statement to
help ensure the integrity of the company as well as to avoid civil or criminal penal-
ties. To assist the audit committee with the review and discussion activity, Exhibit
12.2 contains the overall content of a conflicts-of-interest program. Of course, this
program may be modified and therefore is not all-inclusive.
Additionally, Exhibit 12.3 contains a discussion of possible warning signals
and “red flags” related to the Enron debacle.
In summary, audit committees have increasingly assumed additional responsi-
bilities such as those discussed in this chapter. Perhaps the most challenging are di-
recting and monitoring special investigations related to management fraud and
fraudulent financial reporting, as discussed in Chapters 4 and 11. Based on the ever-
increasing duties and responsibilities of the audit committee, the role of monitoring
business practices will continue to expand into additional areas in the future.


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