This sample audit report can be used to evaluate the effectiveness and efficiency of an organization's current equity compensation administration process and includes the following key activities: assess the accounting and financial reporting requirements, evaluate the adequacy of internal controls, assess the efficiency of each process, and identify improvement opportunities, when applicable.
This report can be used as a general guide to understand the equity compensation process. Organizations should continuously update and monitor the processes included in this document to ensure that it reflects business operations.The following key observations were noted during the review:
- Verification of input for option grants or cancellations by an independent reviewer without access to access to the equity compensation system is not performed.
- Option grant notices and co-investment election forms were missing grantee acknowledgment in a large number of the grants.
- A formal and documented independent reconciliation is not performed between the data contained in the equity compensation system and the transfer agent records and then appropriately reviewed and approved by senior management.
- Terminated employees may not be removed from the equity compensation system on a timely basis, which may result in terminated employees being allowed to exercise otherwise expired options, thus triggering variable accounting rules as “nonemployee” awards.