Apple stock backdating scandal
The problem with this practice, according to the SEC, was that stock option backdating, while difficult to prove, could be considered a criminal act.
One of the larger backdating scandals occurred at Brocade Communications, a data storage company.
Cases of backdating employee stock options have drawn public and media attention.
According to a study by Erik Lie, a finance professor at the University of Iowa, more than 2,000 companies used options backdating in some form to reward their senior executives between 19.
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.
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.
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.
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 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.