Over the past decade, the Securities and Exchange Commission (SEC) has conducted 20 enforcement cases against public companies for insufficient reporting of executive perks, including two last year. The SEC’s expansive view of what constitutes a perk and the low-dollar thresholds for disclosure can present challenges for companies to account for, qualify, and fully explain such perks. This, coupled with the substantial costs incurred by the companies when forced to investigate, defend, and rectify problematic disclosures and internal controls, makes the act of failing to disclose perks highly detrimental to businesses.
According to the SEC’s guidance, any item provided to an executive embodying a personal element is considered a perk unless it’s either “integrally and directly related to the performance of the executive’s duties” or “available on a non-discriminatory basis to all employees.” The low-dollar thresholds for disclosure further compound the situation, wherein companies are required to disclose the total value of perks and personal benefits provided to named executives receiving at least $10,000 of such items annually.
Among undisclosed executive perks, personal travel has been flagged most frequently by the SEC. Cases have consistently involved travel on commercial or chartered aircraft for vacations, sporting events, or other personal activities, along with personal use of a company-owned or leased aircraft. In one particular case, the SEC highlighted a company’s misstatement by disclosing the taxable value, rather than the aggregate incremental cost, of its executives’ personal use of company aircraft.
In order to mitigate risks associated with the disclosure of executive perks, companies can apply strategies such as adhering to the SEC’s narrow integrally-and-directly-related standard, scrutinizing all executive travel expenses, ensuring comprehensive documentation, and not solely relying on executive self-disclosure.
In conclusion, with the SEC’s broad definition of perks and the growing costs associated with misreporting, there’s a pressing need for companies to redefine their internal financial and disclosure controls. To help navigate these turbulent waters, competent legal advice is crucial, recommending strategic measures to proactively manage the risks of non-disclosure, thereby minimizing the chances of attracting costly SEC enforcements.