Sarbanes oxley backdating options


06-Feb-2017 02:05

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But backdating options allows companies to set an exercise price that's lower than the current value of the company's stock.

This makes the options in-the-money for the grantee (Jane Smith, in our example), basically giving her options that are instantly profitable.

In our example, backdating the options is the same as giving Jane Doe a check for ,000.

If the company does so without recording that ,000 on the income statement as compensation, it understates its expenses and overstates its profits, which is a violation of generally accepted accounting principles (GAAP) and has been the grounds for a variety of fraud and miscellaneous charges from federal, state and local regulators.

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.

That allowed companies to essentially pick the lowest stock price during that two-month period and report that as the exercise price on the options, giving companies a way to grant instantly profitable options to employees.

New research (July 2006) by Eric Lie and Randall Heron found that 29.2% of companies issuing options to executives and/or directors between 19 have grant date patterns that suggest backdating or other manipulative practices (such as "spring-loading," the announcement of a grant before good news is released), and 23% of options issued to executives appear to have been backdated or spring-loaded.

The pattern was somewhat more common in technology companies, smaller companies, companies granting options to more executives and directors, and companies with higher stock price volatility.

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Dozens of companies are under investigation by the Securities and Exchange Commission for backdating stock options. Alternatively, a company could hit a low without actually backdating its options by granting awards just before a major (positive) earnings announcement, a practice known as "spring-loading." A more extreme and more clearly illegal practice was to say that an award was exercised on a date other than its actual exercise date.She pays the per share exercise price and can turn around and sell those shares on the exchange for each, netting a profit of per share, or ,000 total.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.Volatility is especially significant: 29% of companies with high volatility appear to have manipulated grant dates, compared to 13% of those with low volatility.

New rules under the Sarbanes-Oxley Act have reduced the practice to 10% of the companies granting options.Let's say Jane now decides to exercise her stock options.



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