What is BACKDATING? Backdating is selecting a date prior to the actual grant when the stock price was lower, thus increasing the award's value. Grant date. This variable accounting treatment would create a negative income statement impact . One study showed that backdating stock options added. Corporate Governance, Ethics, and the Backdating of Stock Options. Article. Feb Emissions Allowances: Accounting and Public Policy Issues. December.
Technically, the timing of options grants does not fall under Regulation FD; however, a case could be made that the end results are similar: Someone or some group benefits to the exclusion of others. In the case of selective disclosures, certain analysts and their clients benefit; in the case of option timing, certain inside executives benefit. Using Indexing to Determine Option Price Many people might argue that backdating and repricing have occurred because companies thought it was unfair to penalize executives for recent downturns in stock prices that were due to macroeconomic pressures and industry fluctuations beyond the control of CEOs.
While backdating and repricing present questionable behaviors by corporate compensation committees, an alternative methodology—indexing stock options—might be viewed as more fair and effective in rewarding the highest-performing executives. In such a process, the board of directors would select a group of companies, such as industry rivals, to serve as a benchmarking peer group. The option-issuing company indexes or ties the exercise price to the benchmark group.
In theory, economic and industry factors should affect similar companies in similar fashion. Many other companies voted on adopting the use of indexed options inbut few of those measures were approved. Despite the inherent fairness in the indexing concept, many major U.
On the positive side, indexing would eliminate the situation in which CEOs are granted millions of dollars of options in a rapidly rising stock market when the companies led by those CEOs performed worse than competitors.
Indexing would also stop the practice of repricing stock options. Such perspectives can serve as the basis for asking important questions when compensation packages are being awarded. It was noted above that repricing options differently for different groups of grantees may be viewed as unethical.
Using virtue ethics to gauge this tactic, the authors examined both the action and the reasons for taking a particular action as follows: The justice theory of ethics requires equals to be treated the same way but allows unequals to be treated differently; executives could be viewed as equals and all others could be viewed as unequals.
As such, differential repricing between the two groups would be considered ethical and appropriate. The international business community, in the form of the OECD and ICGN, provides no indication that executives should be viewed any differently from other shareholders. Assessing options repricing and backdating from an ethical theory of rights perspective requires determining who is entitled or has the right to what. Investors and creditors who have provided funds to an organization have the right to receive accurate, reliable, and transparent financial statements.
Options backdating and repricing either ignore or do not consider that right of those investors and creditors, and, as such, these techniques would be seen as unethical. Engaging in options backdating and repricing as a corporate employee, or an external auditor, with knowledge that such actions have taken place, would be unethical from a professional perspective.
Options backdating and repricing can also be viewed from a utilitarian perspective.
The decision of whether the actions are ethical would be made by weighing the benefits to management as individuals and the perceived benefits to the company and its shareholders via increases in share price against the costs of the action and the long-term negative effects on investors and creditors of false and misleading financial information. The Kantian theory of ethics named for the 18th-century German ethicist Immanuel Kant directs one to act only as if the action were to become universal law.
From this perspective, if stock option backdating and repricing were intended to manipulate or deceive any stakeholders, then the action would be considered a lie and could not be justified by Kantian ethics; the ends do not justify the means. The issues of spring-loading and bullet-dodging can also be viewed from these three ethical standpoints. If one accepts the fiduciary responsibility of management to all organizational shareholders, then selectively timing the distribution of options places executives in a better position than other shareholders and, as such, discriminates against nonexecutive owners.
The ethical theory of utilitarianism is violated by spring-loading and bullet-dodging because there are more market participants who are not executives than there are those who are executives. These two tactics also violate Kantianism: It is highly unlikely that the populace would agree that treating one category of market participants executives differently from another category all other investors and potential investors would be appropriate.
Thus, although these two activities are undoubtedly legal, they are without question unethical—and the investing public has had its fill of the lack of business ethics! The SFAS R grant date and the fair value of the option on the grant date by officer; The closing market price on the grant date if that price is higher than the option exercise price; and The date that the board of directors or compensation committee of the board actually granted the options, if that date differs from the grant date.
For example, if a company has a plan to issue option grants in coordination with the release of material nonpublic information, that [information] will now be clearly described. The First to Fall The first company to actually pay a fine in connection with backdating charges was Brocade Communications Systems Inc.
In AprilApple Inc.
At that time, Reyes was the first executive to stand trial, although executives at other companies had been charged with crimes related to backdating.
Interestingly, Reyes never backdated any options to himself, only for employees he wanted to retain at the company. The accounting rules were too complex to be understood by Reyes and many others.
Balancing Ethics and Incentives Companies that have been found to backdate options must restate the financial statements. SEC Staff Accounting Bulletin SAB 99 specifically addressed this issue by requiring that an error involving an increase in management compensation be restated regardless of the amount. In turn, the option recipients may find themselves subject to an IRS tax audit, because additional corporate recognition of compensation expense would entail the recognition of income by the recipients.
The use of stock option pricing models required by SFAS R could create future ethical and technical problems if those models are based on inaccurate assumptions or variables as input to the valuation process.
So much interest and concern over stock option backdating and repricing, evinced by so many individuals and organizations, bodes poorly for the legitimacy of the potential motives for such actions.
Such actions cannot withstand examination under any ethical test and should raise concern among investors, creditors, executives, and boards of directors.
Based on the outcome of the Brocade case, such concerns have permeated the minds of potential jurors and thus the wider public. Stock options were designed as a way to provide pay for performance, not to reward poor performance by backwards-looking repricing or backdating. Grant date unclear due to unanimous consent 3.
Ethics of Options Repricing and Backdating
Company policy to give lowest or average price during a period 4. Backdating to attract a new employee with in the money options; to sweeten a deal 5. Backdating to enrich value for all employees 6. Backdating to enrich value for management 7.
Creating false paperwork to justify options 5 How Was Backdating Detected?
Academics, analysts and news organizations. The WSJ won a Pulitzer Prize for its investigative reporting, which began in March — The Perfect Payday Affiliated Computer Services CEO - all six of his stock- option grants from to were dated just before a rise in the stock price, often at the bottom of a steep drop.
A Wall Street Journal analysis suggested the odds of this happening by chance are extraordinarily remote -- around one in billion. Affiliated Computer Services CEO - all six of his stock- option grants from to were dated just before a rise in the stock price, often at the bottom of a steep drop.
No, the SEC eventually came to "an increasing realization that the companies were in fact lying about the timing of the grants.