How Incoming Boards Inventory And Rescind Legacy Executive Allowances
Incoming boards reconcile general ledgers against board minutes, reclassifying unratified perks as ultra vires expenses subject to immediate written revocation.
unratified perquisites
Meaning
Executive benefits and personal expenses paid by a company without the formal approval of the board of directors constitute unauthorized compensation. These unratified perquisites include personal travel or housing allowances that have not been vetted by the compensation committee. This classification applies to any unapproved fringe benefit and stops applying once the board formally ratifies the expense.
Board Authorization
Fiduciary duties require directors to review and approve all forms of executive compensation. The presence of unratified perquisites suggests a lack of internal accounting controls within the company. This lack of control can lead to shareholder derivative suits or regulatory investigations.
Tax Adjustment
Internal Revenue Service guidelines require all compensation to be reported accurately on executive tax forms. When unratified perquisites are discovered, the company must recalculate its tax filings and adjust the executive’s reported income. This adjustment often results in penalties and interest for both the company and the individual officer.
Such corrections require significant administrative effort and can damage the company’s reputation with investors. A proactive audit of executive expense accounts is the most effective way to prevent these tax liabilities.
Compensation Audit
Independent auditors examine general ledgers to identify personal expenses disguised as business costs. The discovery of unratified perquisites requires immediate disclosure to the board of directors. This disclosure ensures that corrective action can be taken before the annual financial reports are finalized.