Does backdating explain


04-Aug-2020 10:23

Since the advent of stock option backdating, corporate policies have moved first toward a posture of encouraging backdating as a standard business practice, but then toward a posture of avoidance as public scandals emerged and investigations into fraudulent or dishonest business practices increased despite a commonly held belief that backdating was an acceptable and legal practice.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.The act of granting options with strike prices that are lower than the current market share price is technically legal, but the act of backdating the options may be in breach of the company's option plan, a shareholder-approved document that highlights the company's options policy.In some cases, backdating can be considered an act of fraud and an SEC investigation may result.However, this concept is not perfect and there are ways that executives can take advantage of the way that options are granted in order to earn money.

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This process occurred when companies were only required to report the issuance of stock options to the SEC within two months of the grant date.

For example, suppose that it is August 16, 2006, and the closing share price of XYZ Corp. On June 1, 2006, XYZ Corp.'s stock price was at a six-month low of .

Technically, any options granted today should bear a strike price of .

Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required.

In 1972, a new revision (APB 25) in accounting rules resulted in the ability of any company to avoid having to report executive incomes as an expense to their shareholders if the income resulted from an issuance of “at the money” stock options.

This is the granted option that would be reported to the SEC.



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