The impact of the options backdating scandal on shareholders

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.But, there are also some companies out there that have bent the rules by both hiding the backdating from investors, and also failing to book the grant(s) as an expense against earnings.On the surface - at least compared to some of the other shenanigans executives have been accused of in the past - the options backdating scandal seems relatively innocuous.However, since Sarbanes-Oxley, grants must be filed electronically within two business days of an issue or grant.

As a result, the company has been forced to recognize a stock-based expense increase of 3 million between 19. It has also been the subject of a civil and a criminal complaint. According to a 2005 study by Erik Lie at the University of Iowa, more than 2,000 companies used options backdating in some form to reward their senior executives between 19.In addition to Brocade, several other high profile companies have become embroiled in the backdating scandal as well.For example, in early November 2006, United Health reported that it would have to restate earnings for the last 11 years, and that the total amount of restatement (related to improperly booked options expenses) could approach, or even exceed, 0 million. While reports of past indiscretions are likely to continue to surface, the good news is that companies will be less likely to mislead investors in the future. Prior to 2002, when the legislation was adopted, an executive didn't have to disclose their stock option grants until the end of the fiscal year in which the transaction or grant took place.But ultimately, it can prove to be quite costly to shareholders.(To learn more, see Cost to Shareholders The biggest problem for most public companies will be the bad press they receive after an accusation (of backdating) is levied, and the resulting drop in investor confidence.

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