Stock options backdating rules neo date dating script


12-May-2020 20:54

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The other major way that backdating can be misleading to investors relates to the method by which the company accounts for the options.

Until very recently, a company that granted stock options to executives at fair market value did not have to recognize the cost of the options as a compensation expense.

Although many companies have been identified as having problems with backdating, the severity of the problem, and the consequences, fall along a broad spectrum.

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.

In 1982, a new tax code (162 M) provision declared all executive income levels over one million dollars to be “unreasonable” in order to increase taxes on all applicable salaries by removing them from their previous tax deductible status 4.

To avoid having to pay higher taxes, many companies adopted a policy of issuing “at the money” stock options in lieu of additional income, with the idea that the executive or employee would benefit through the option by working to increase the value of the company without exceeding the one million dollar deductibility cap for executive income 5.

When company executives discovered that they had the ability to backdate stock option grants, thus making them both tax deductible and “in the money” on the date of actual issuance, the common practice of stock option backdating for financial gain began on a widespread level.

The problem with this practice, according to the SEC, was that stock option backdating, while difficult to prove, could be considered a criminal act 6.

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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.

There is a five-year statute of limitations for securities fraud, and under the Sarbanes-Oxley Act of 2002, option grants to senior management must be reported within two days of the grant date.



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