Jobs backdating

Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required.

In 1972, a new revision (APB 25) in accounting rules resulted in the ability of any company to avoid having to report executive incomes as an expense to their shareholders if the income resulted from an issuance of “at the money” stock options.

This is not always the case, according to a ruling by federal judge William Alsup of the U. District Court for the Northern District of California.

According to Alsup’s reasoning and subsequent ruling, it is improper to infer fraudulent activity based solely on the occurrence of options backdating – further facts must be present and proven before the act can be considered to be fraudulent.

Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.

This is a way of repricing options to make them valuable or more valuable when the option "strike price" (the fixed price at which the owner of the option can purchase stock) is fixed to the stock price at the date the option was granted.

The other major way that backdating can be misleading to investors relates to the method by which the company accounts for the options.

Until very recently, a company that granted stock options to executives at fair market value did not have to recognize the cost of the options as a compensation expense.Options backdating may still occur under the new reporting regulations, but Sarbanes-Oxley compliant backdating is far less likely to be used for dishonest reasons due to the short time frame that is allowed for reporting.As a result, numerous companies are conducting internal investigations to determine if, when, and how backdating occurred, and are filing amended earnings statements and tax forms to show the issuance of “in the money” options in place of the “at the money” options that were previously reported.However, in late 2005 and early 2006, the issue of stock options backdating gained a wider audience.Numerous financial analysts replicated and expanded upon the prior academic research, developing lists of companies whose stock price performance immediately after options grants to senior management (the purported dates of which can be ascertained by inspecting a company's Form 4 filings, generally available online at the SEC's website) was suspicious.The problem with this practice, according to the SEC, was that stock option backdating, while difficult to prove, could be considered a criminal act.

Tags: , ,