Consequences of options backdating

However, companies must report their option grants within two days of their issue and list all stock options as expenses.

To avoid backdating problems, be sure that your option-granting practices are consistent and well documented. But improper backdating may require restatements of earnings.

Executives can enjoy instant profits, and they and the company can avoid some of the negative consequences typically associated with in-the-money options.

Regulators recognize that legitimate discrepancies may exist between the date an option is granted and the date it’s finalized due to innocent administrative delays.

This issue is one of intense public interest because it strikes at the heart of the relationship among a public company's management, its directors, and its shareholders.

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As you know, during the last year the Commission has been intensely focused on the quality of disclosure of executive compensation.I will let Chairman Olson speak to the steps the PCAOB is taking to address these issues from the auditing regulator's perspective, but I'd like to assure the Committee, and the public, that the Commission is working in close cooperation with the PCAOB in this important area. But here is a typical example of what some companies did: They granted an "in-the-money" option-that is, an option with an exercise price lower than that day's market price.They did this by misrepresenting the date of the option grant, to make it appear that the grant was made on an earlier date when the market value was lower. This discussion comment focuses on several fundamental issues that confront researchers examining the backdating scandal and other related decisions.Specifically, we discuss the decision models for executives engaged in backdating and the potential role of social networks among directors, selection considerations, institutional voting behavior, and how backdated options can be replicated with existing equity instruments.

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