PCAOB Chair Warns of CEO Pay Controls

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Lavish compensation packages for top executives may be a thing of the past, as the head of the new accounting watchdog group warned business leaders that government may intervene if pay doesn't come down.

"If the anger of the American people continues and business leaders do not wake up soon, I predict that there will be legislation," William McDonough, chairman of the Public Company Accounting Oversight Board (PCAOB), said Tuesday.

McDonough told a gathering at the Economic Club of Chicago that a company's compensation committee should review the appropriate level of CEO pay, Reuters reported. And if a chief executive quits over the issue, he said it would be "good riddance."

"I would turn to the directors and point out that there are lots of fine people in America, many of them in this room, who would be happy to be CEOs at more rational levels of income," McDonough said.

As accounting scandals have unfolded over the last few years, the public has been shocked not only by the level of mismanagement at companies such as Tyco and Enron, but also by the exorbitant pay and benefit packages top executives received. Investors have complained that executive pay is out of line with share price performance.

The Securities and Exchange Commission (SEC) set up the PCAOB about a year ago to develop regulations for the auditing industry. Accounting firms must register with the board to audit a publicly traded company — 771 have registered so far, McDonough said.

The new regulations and expectations are forcing all companies, big and small, to re-examine how they do business.

Arthur Kroll, chairman and CEO of KST Consulting Group Inc., a New York-based firm that specializes in executive compensation, said that a board's compensation committee should not look so much at what they did in the past, but plan for the future. Compensation committees will be under intense pressure to justify their compensation decisions, he told Industry Week.

"I think executive directors will be doing a lot more. Audits will be more careful, and the audit committee will function better," Kroll said. "We won't have towsy-wowsy type directors as we witnessed in Enron — seemingly ignorant of what was going on. But that doesn't mean that they can discover fraud either."

Earlier on Tuesday, the PCAOB said it was planning to ask auditors for a more thorough check of their clients' internal controls. Rather than concentrate on whether companies have followed accounting rules, the PCAOB may ask auditors to also go through invoices, contracts and even observe employees in charge of controls at the companies, Reuters reported. The PCAOB will consider the issue when it meets next month.

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