Just when the US public was beginning to recover from the fraudulent accounting scandals such as Enron and WorldCom, Americans' trust in corporate leaders was dealt another serious blow upon the revelation that 200 companies had been engaging in another form of unethical conduct -- the secret backdating of stock options for their corporate captains. "Backdating" has raised justifiable criticism from compensation experts, because instead of targeting the executive's future performance on behalf of the company, it rewards only the fact that the executive is presently on the company payroll. In this aspect of the backdating storm, there is a consistency with the Enron form of accounting fraud, namely, that the shareholders, employees, and tax authorities don't really matter. What matters s...
Stock options have become an increasingly popular way to compensate executives and employees, with Standard and Poor's 500 companies awarding more than $256 billion in stock options over the past decade. The SEC, the US Department of Justice, and the IRS are jointly investigating instances of backdated stock options. Through backdating, employers select grant dates that coincide with recent stock lows, thereby increasing the value of options granted to employees. Backdating stock options creates tax problems for corporations, their top executives, and other employees. Backdating may lead to misreporting corporate taxable income, misreporting employees' wages, and incorrectly withholding federal income taxes and Federal Insurance Contributions Act taxes. Employee compensation expenses ar...
After two years of escalation in the stock options backdating scandal, it now appears the investigations are coming to an end with criminal sentences for top executives and settlements with involved companies. Backdating is a practice in which stock option grant dates are adjusted to an earlier time when the stock was trading at a lower price. This allows recipients of the options to receive greater profits when they sell their shares at higher market prices.
Until recently, financial research has been puzzled by an unusual pattern of stock returns during the period surrounding stock option grant dates for CEOs and other top executives. Financial accounting and reporting standards clearly define the appropriate accounting treatment when employees receive stock-based compensation. Examples of stock-based employee compensation plans include stock purchase plans, stock options, restricted stock, and stock appreciation rights. In most instances, determining the measurement date is not difficult because corporate governance provisions, stock option plans, and applicable laws specify the required granting actions that would confirm the stock option grant and establish the measurement date. Some backdating companies used incorrect stock-option meas...
Michael Shanahan Sr. was sentenced to three years of probation and ordered to pay $7.8 million in restitution for backdating stock options at Engineered Support Systems. He was also ordered to pay a $40,000 fine. Backdating stock options is not illegal as long as it is disclosed.
The first part of a series report on stock options backdating scandal is presented. Shareholders and their lawyers have read the stories in the press exposing unusual and opportune coincidences of option grant dates matching the date on which a company's stock was trading low. They are filing class action and derivative lawsuits against companies and current and former executives as a result. In response to such a lawsuit, the board of directors must immediately consider appointing a special independent committee to pursue a full and impartial assessment of these practices. At a meeting called for that purpose, the board should appoint a special committee of disinterested board members to conduct the internal investigation. Undisclosed backdating practices in the past typically led to i...
Stock options backdating does not inherently violate any federal mandates. But for companies that lack visibility into option issuance processes, options backdating can create real business risks because of SEC disclosure and IRS tax accounting requirements. More than 100 companies are under investigation for options backdating. Although this practice is not illegal, regulators may view the practice as an indicator of potentially greater wrongdoing. The short version of the options-backdating story is that organizations that retroactively date options must notify the SEC, expense the costs of the options against earnings in the appropriate quarter, and ensure that appropriate tax deductions are taken. Unfortunately, the story has become more complex because the difficulty of meeting the...
WASHINGTON, Aug. 9 /U.S. Newswire/ -- Three former executives of Comverse Technology Inc. ("Comverse"), a publicly-held computer software company, were charged today for their roles in orchestrating a long-running scheme to manipulate the grant of millions of Comverse stock options to themselves and to employees, the Department of Justice announced today. Former Chief Executive Officer Jacob "Kobi" Alexander, former Chief Financial Officer David Kreinberg and former General Counsel William F. Sorin allegedly orchestrated the scheme by fraudulently backdating the options and operating a secret stock options slush fund. The charges were announced by Deputy Attorney General Paul J. McNulty and Director of the Division of Enforcement Linda Thomsen of the Securities and Exchange Commission (...
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