June 19, 2007
While SAS#5 is a significant improvement over SAS#2 in many ways it still has the fatal flaw of not acknowledging the central role of compensation systems in internal controls. Compenstation systems are in fact the most important internal controls. Compensation systems and career paths that do not require and enforce objectivity and impartiality towards company performance on the part of those responsible for keeping financial records and preparing financial reports are inherently flawed and will inevitably produce biased, and ultimately fraudulent financial reporting. The failure of SAS#5 to require auditors to evaluate the relationship of compensation and incentive systems to CFO and CAO objectivity will inevitabily lead to more frauds and further breakdowns in our financial reporting system.