What is the purpose of backdating
And in the Enforcement Division, we gathered information and data regarding specific cases to bring the issues into focus, culminating in our enforcement actions over the last several years. If the only reason that can be offered as a justification for backdating is that "everyone else was doing it," that's a poor excuse for what amounts to unjust enrichment of a few employees at the expense of corporate shareholders. Or it could choose to make at the money grants, and take full advantage of their accounting and tax advantages. Similarly, stock options were initially developed in the s as an anti-takeover device, but because of unrelated changes in the tax and accounting rules, they morphed into a means of providing non-salary performance-based compensation, which was not their original purpose. Our Office of Economic Analysis then analyzed data and refined the areas of concern. Aside from the prospect of an SEC enforcement investigation and possible criminal liability, options backdating in all its various forms has left the companies involved in an accounting, tax and human resources quagmire. From the supply side, the question is what motivates a firm to grant a backdated option, and from the demand side, what motivates an executive to demand or, at the very least, accept a backdated option? Securities and Exchange Commission Washington, D. Like related party transactions, executive compensation is an important issue for boards of directors.
We therefore focus on the value at exercise and eventual sale of the shares and demonstrate the role the income tax regime plays in determining the after-tax value to the executive. Based on this assumption, minimum tax will not apply in any of the examples and AMT will apply only in the fourth example. Aside from the prospect of an SEC enforcement investigation and possible criminal liability, options backdating in all its various forms has left the companies involved in an accounting, tax and human resources quagmire. In the money grants offered instant paper gains and the prospect of future wealth that was obviously attractive to employees, some of whom were themselves entrusted to decide precisely when options would be granted. Therefore understanding the drivers that influence demand is critical to understanding the whole story behind backdating of executive stock options. By following a standard options grant process, a company gets fair and transparent results, and there should be no random anomalies to explain. The question of demand requires consideration of what an executive receives in monetary value from a backdated option i. Compared to other internal control measures, creating a standard process and a fixed schedule for the award of stock option compensation is relatively easy and inexpensive, especially when you consider the reported costs of backdating to companies involved. There's something very wrong here. Most of the research to date has focused on supply side factors e. From a compliance perspective, creating and following a consistent process for awarding stock options seems to me to be something of a "no-brainer. Are you being fair to your fans? If a particular grant process isn't working, then it should be changed. The trouble with the timing approach is it's nearly impossible to know in advance which day will be the most advantageous grant date. With respect to both, there are pending parallel criminal actions as well. They raised the same concerns as I had: To hide the backdating scheme, they also allegedly altered corporate records and lied to the company's auditors. The relative share values at the time of vesting and December 31 of each year that vested options remain unexercised give rise to significant tax differences upon exercise or sale. I thought I'd talk a little about where we are from an Enforcement perspective. The applicable tax rules for stock options granted by publicly-traded companies are set out in section 7 and paragraph 1 d of the Canadian Income Tax Act. For options issued by a public corporation, one-half of the stock option benefit is deductible under paragraph 1 d if three conditions are met: Meanwhile other legal and regulatory developments occurred that created distinctions between in the money and at the money options. But SPEs migrated into other industries and morphed into a monster that was used extensively by the likes of Enron in perpetrating financial frauds. And in the Enforcement Division, we gathered information and data regarding specific cases to bring the issues into focus, culminating in our enforcement actions over the last several years. However, rank and file employees who receive ISOs may not be aware they were granted discounted stock options and could be reassessed on the basis that a tax liability arose in the year the options vested and subject to an income inclusion and additional tax under I.
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