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 the owner of the Option backdating and its implications of globalization can purchase stock is fixed to the stock price at the date the option was granted.
Cases of backdating employee stock options have drawn public and media attention. Stock options are often granted to upper management.
While options backdating is not always illegal,  it has been called "cheating the corporation in order to give the CEO more money than was authorized.
To be legal, backdating must be clearly communicated to the company shareholders, properly reflected in earnings, and properly reflected in tax calculations.
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 Option backdating and its implications of globalization which a lengthy approval process is required.
In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation Option backdating and its implications of globalization in the form of stock options contracts that Option backdating and its implications of globalization only become valuable if the underlying stock price were to increase at a later time.
The problem with this practice, according to the SEC, was that stock option backdating, while difficult to prove, could be considered a criminal act. One of the larger backdating scandals occurred at Brocade Communicationsa data storage company. It allegedly failed to inform investors, or account for the options expense s properly.
Since the advent of stock option backdating, corporate policies have moved first toward a posture of encouraging backdating as a standard business practice, but then toward a posture of avoidance as public scandals emerged and investigations into fraudulent or dishonest business practices increased despite a commonly held belief that backdating was an acceptable and legal practice.
In the modern business world, the Sarbanes-Oxley Act has all but eliminated fraudulent options backdating by requiring companies to report all options issuances within 2 days of the date of issue. 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.
Option backdating and its implications of globalization it Option backdating and its implications of globalization true that many forms of backdating are not fraudulent or criminal in nature, there is a largely prevalent public opinion that all forms of backdating are the equivalent of fraud. District Court for the Northern District of California. Another public perception is that options backdating stems from executive corruption.
Academic researchers had long been aware of the pattern, exhibited by some companies,
Option backdating and its implications of globalization share prices rising dramatically in the days following grants of stock options to senior management.
However, in late and earlythe 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.
For instance, public companies generally grant stock options in accordance with a formal stock option plan approved by shareholders at an meeting. Many companies' stock option plans provide that stock options must be granted at an exercise price no lower fair market value on the date of the option grant.
Thus, backdating can Option backdating and its implications of globalization misleading to shareholders in the sense that it results in option grants that are favorable than the shareholders approved Option backdating and its implications of globalization adopting the stock option plan.
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. 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.
If a company backdated its stock options, but failed to recognize a compensation expense, then the company's Option backdating and its implications of globalization may not be correct, and its quarterly and annual financial reports Option backdating and its implications of globalization investors may be misleading. Although many companies Option backdating and its implications of globalization been identified as having problems with backdating, the severity of the problem, and the consequences, fall along a broad spectrum.
At one extreme, where it is clear that top management was guilty of conscious wrongdoing in backdating, attempted to conceal the backdating by falsifying documents, and where the backdating resulted in a substantial overstatement of the company's profitability, SEC enforcement actions and even criminal charges have resulted. Toward the other extreme, where the backdating was a result of overly informal internal procedures or even just delays in finalizing the paperwork documenting options grants, not intentional wrongdoing, there is likely to be no formal sanction—although
Option backdating and its implications of globalization company may have
Option backdating and its implications of globalization restate its financial statements to bring its accounting into compliance with applicable accounting rules.
With respect to the more serious cases of backdating, it is likely that most of the criminal actions that the government intended to bring were brought in There is a five-year statute of limitations for securities fraud, and under the Sarbanes-Oxley Act ofoption grants to senior management must be reported within two days of the grant date. This all but eliminated the opportunity for senior management to engage any meaningful options Therefore, any criminal prosecution is likely to be based on option grants made Option backdating and its implications of globalization Sarbanes-Oxley took effect, and the deadline facing the government for bringing those prosecutions has already passed.
As of 17 Novemberbackdating has been identified at more than companies, and led to the firing or resignation of more than 50 top executives and directors of those companies. Notable companies embroiled in the scandal include Broadcom Corp. Some of the more prominent corporate figures involved in the controversy currently are Steve Jobs and Michael Dell. Anderson and former Apple general counsel Nancy R. Heinen for their alleged roles in backdating Apple options.
According to Section 83 of the Codeemployees who receive property from the employer must recognize taxable income in the year in which that property vests i. Such Option backdating and its implications of globalization may be construed as illegally avoiding income recognition because falsely under-reporting the market price of such stocks makes them appear to have no value in excess of the strike price at the time the option is granted.
The Clinton tax increase amended the Code to include Section Option backdating and its implications of globalization which presumptively makes compensation in excess of one million dollars unreasonable for public companies.
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.
However, if the exercise price is below the market price so that the options are in the moneythen the compensation will not be performance based, as the options would have intrinsic value immediately.
See page 5 of the background briefing. As an economic and practical matter, backdating and cherry-picking dates with the lowest market price of the underlying stock may be evidence that the options granted were not reasonable compensation, because the grant of the options would not be performance based.
In such a case, tax deductions would be denied. From Wikipedia, the free encyclopedia. The examples and perspective Option backdating and its implications of globalization this article may not represent a worldwide view of the subject.
You may improve this articlediscuss the issue on the talk pageor create a new articleas appropriate. March Learn how and when to remove this template message. Is Backdating the New Corporate Scandal? The Enforcement Perspective", https: Retrieved 11 December Sing or Keep Mum? Retrieved from https: Options finance Corporate scandals Corporate crime. Articles with limited geographic scope from March Views Read Edit View history.