Backdating of stock option
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. Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within a two-month period. Due to the implimentation of the Sarbanes-Oxley Act of , the rule has been changed and companies are now required to report the granting of options within two business days, which effectively has removed this loophole. If a company backdated its stock options, but failed to recognize a compensation expense, then the company's accounting may not be correct, and its quarterly and annual financial reports to investors may be misleading. Heinen for their alleged roles in backdating Apple options. Notable companies embroiled in the scandal include Broadcom Corp. The act of options backdating became much more difficult after companies were required to report the granting of options to the SEC within two business days.
Initially, lax enforcement of the reporting rule was also blamed for allowing many companies to sidestep the rule adjustment that stemmed from Sarbanes-Oxley. 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. The Enforcement Perspective", https: For instance, public companies generally grant stock options in accordance with a formal stock option plan approved by shareholders at an annual meeting. This is the granted option that would be reported to the SEC. Anderson and former Apple general counsel Nancy R. For example, the SEC filed a civil lawsuit in against Trident Microsystems and two former senior executives from the company for stock option backdating violations. 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. In such a case, tax deductions would be denied. This included options backdating presented in offer letters to new hires. Many companies' stock option plans provide that stock options must be granted at an exercise price no lower than fair market value on the date of the option grant. Some of the more prominent corporate figures involved in the controversy currently are Steve Jobs and Michael Dell. 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. 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 the company may have to restate its financial statements to bring its accounting into compliance with applicable accounting rules. Denial of deduction under Section m of the tax code[ edit ] The Clinton tax increase amended the Code to include Section m which presumptively makes compensation in excess of one million dollars unreasonable for public companies. In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time. Sing or Keep Mum? Due to the implimentation of the Sarbanes-Oxley Act of , the rule has been changed and companies are now required to report the granting of options within two business days, which effectively has removed this loophole. It allegedly failed to inform investors, or account for the options expense s properly. Heinen for their alleged roles in backdating Apple options. Is Backdating the New Corporate Scandal? The company would then grant the option but date it at or near its lowest point. 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. If a company backdated its stock options, but failed to recognize a compensation expense, then the company's accounting may not be correct, and its quarterly and annual financial reports to investors may be misleading. Deferral of recognition into employee's gross income[ edit ] According to Section 83 of the Code , employees who receive property from the employer must recognize taxable income in the year in which that property vests i.
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