Backdating of options is
That, in turn, understates the company's expenses and overstates its profits, which is a violation of generally accepted accounting principles and has been the grounds for a variety of fraud and miscellaneous charges from federal, state and local regulators. Many companies' stock option plans provide that stock options must be granted at an exercise price no lower than fair market value on the date of the option grant. For instance, public companies generally grant stock options in accordance with a formal stock option plan approved by shareholders at an annual meeting. This makes the options in-the-money for the grantee Jane Smith, in our example , basically giving her options that are instantly profitable. Lin was accused of backdating stock option documents in order to give the appearance that options were granted on earlier dates than issued. The problem with this practice, according to the SEC, was that stock option backdating, while difficult to prove, could be considered a criminal act.
Sing or Keep Mum? According to the September 5, Joint Committee on Taxation background briefing if the CEO or other top executive gets stock option grants with exercise price equal to market price, then the options granted would be presumed to be reasonable because they would be performance based. Backdating What it is: The company would then grant the option but date it at or near its lowest point. Due to the implimentation of the Sarbanes-Oxley Act of , the rule has been changed and companies are now required to report the granting of options within two business days, which effectively has removed this loophole. The SEC would go on to investigate and sue companies and related parties that were found to backdate options, in some cases, as part of fraudulent and deceptive schemes. This is important to note, because the grant date is what determines the exercise price on the options. The legal complaint alleged that from to , the former CEO and the former chief accounting officer directed the company to engage in schemes to provide undisclosed compensation to executives and certain employees. District Court for the Northern District of California. The Securities and Exchange Commission SEC previously allowed companies to report the issuance of stock options up to two months after the options were granted. If a company backdated its stock options, but failed to recognize a compensation expense, then the company's accounting may not be correct, and its quarterly and annual financial reports to investors may be misleading. Options Backdating What it is: The general reason companies backdate options is to create a lower exercise price, which in turn increases the probability that exercising the options will make more money for the optionee. For instance, public companies generally grant stock options in accordance with a formal stock option plan approved by shareholders at an annual meeting. This all but eliminated the opportunity for senior management to engage any meaningful options backdating. However, in late and early , the issue of stock options backdating gained a wider audience. Some of the more prominent corporate figures involved in the controversy currently are Steve Jobs and Michael Dell. The act of options backdating became much more difficult after companies were required to report the granting of options to the SEC within two business days. However, if the company granted options with an exercise price below fair market value, there would be a compensation expense that had to be recognized under applicable accounting rules. Granting stock options to employees is a generally accepted and perfectly legal form of compensating employees, and typically companies grant stock options with an exercise price that is equal to the market price of the shares on the date of the grant. Options backdating occurs when a company grants an option that is dated prior to the date the company granted the option. That, in turn, understates the company's expenses and overstates its profits, which is a violation of generally accepted accounting principles and has been the grounds for a variety of fraud and miscellaneous charges from federal, state and local regulators. However, if the exercise price is below the market price so that the options are in the money, then the compensation will not be performance based, as the options would have intrinsic value immediately. In such a case, tax deductions would be denied. Typically, the grant date of the stock options is the same as the date of the board meeting. In the past, granted options were only required to be disclosed to the Securities and Exchange Commission SEC within two months of the options being granted, which gives companies a window for backdating.
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