Backdating of executive
While not quantifiable in terms of dollars and cents, in some cases, the damage to the company's reputation could be irreparable.
Another potential ticking time bomb, is that many of the companies that are caught bending the rules will probably be required to restate their historical financials to reflect the costs associated with previous options grants. In others, the costs may be in the tens or even hundreds of millions of dollars.
If the company is punished for its actions, its value is likely to drop substantially, putting a major dent in shareholders' portfolios.
A Real-Life Example A perfect example of what can happen to companies that don't play by the rules can be found in a review of Brocade Communications.
However, when granting options, the details of the grant must be disclosed, meaning that a company must clearly inform the investment community of the date that the option was granted and the exercise price. In addition, the company must also properly account for the expense of the options grant in their financials.
If the company sets the prices of the options grant well below the market price, they will instantaneously generate an expense, which counts against income.
But, there are also some companies out there that have bent the rules by both hiding the backdating from investors, and also failing to book the grant(s) as an expense against earnings.
On the surface - at least compared to some of the other shenanigans executives have been accused of in the past - the options backdating scandal seems relatively innocuous.
The act of options backdating has become much more difficult as companies are now required to report the granting of options to the SEC within two business days.
But ultimately, it can prove to be quite costly to shareholders.
(To learn more, see .) Cost to Shareholders The biggest problem for most public companies will be the bad press they receive after an accusation (of backdating) is levied, and the resulting drop in investor confidence.
That is, they grant their executives stock options with an exercise price (or price at which the employee can purchase the common stock at a later date) equivalent to the market price at the time of the option grant.
They also fully disclose this compensation to investors, and deduct the cost of issuing the options from their earnings as they are required to do under the Sarbanes-Oxley Act of 2002.
The process of granting an option that is dated prior to the date that the company granted that option.