Backdating Employee Stock Options

By Raquel Meyer Alexander, Mark Hirschey, and Susan Scholz

OCTOBER 2007 - Revelations concerning option-backdating practices at a number of corporations have led to criminal indictments, executive turnover, and financial restatements. Backdating creates the illusion that employee stock options were issued on an at-the-money basis when in fact they were in-the-money at the true measurement date. While granting in-the-money options is legal, backdating options to conceal their true nature leads to serious financial reporting problems and severe legal consequences.

Options backdating creates tax problems for corporations, executives, and other employees. Backdating may lead to misreporting corporate taxable income, misreporting employees’ wages, and incorrectly withholding FICA and federal income taxes. Given the potential consequences of backdating, anyone who might be affected should be aware of the issues involved.

Full Story

Publisher's Column

Options Backdating

Just when it seemed safe to close the book on the scandals of the pre–Sarbanes-Oxley, pre–Internet bubble era, the stock options backdating fiasco that came to light in 2006 is a reminder that the history of the period is still being written. While the legality of stock options backdating will ultimately be decided case by case in the courts, dozens of companies are currently under investigation. Internal investigations may be initiated by a company’s board of a directors through a special committee. Full Story

Connecting the Dots

Over the past year, this column has addressed two major public policy issues that may seem, at first, to have little to do with one another. One issue—the estate tax (covered in September 2006)—is the on-again, off-again tax imposed on the estates of high-net-worth taxpayers after death. The other—Social Security (covered in February 2007)—is the rapidly depleting trust fund originally intended to spare hard-working Americans from living out their golden years in poverty.
Full Story

Ethics of Options Repricing and Backdating

Just when it seemed that America’s corporate scandals had tapered off and public trust in executives was beginning to rebound, the media revealed two techniques that corporations were using to enhance management pay packages: the repricing and the backdating of stock options. Stock options have been used as a means of paying top-level employees since approximately 1957; they became extremely popular in the early 1980s for employees in the high-tech start-up companies of Silicon Valley. Full Story

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices


Visit the new