Stock Option Backdating Ethical and Accounting Cha

Information about Stock Option Backdating Ethical and Accounting Cha

Published on February 20, 2008

Author: Carlton

Source: authorstream.com

Content

Stock Option Backdating: Ethical and Accounting Challenges:  Stock Option Backdating: Ethical and Accounting Challenges Rick Fezell, Ernst & Young Kirk Hanson, Markkula Center for Applied Ethics, SCU What is a STOCK OPTION?:  What is a STOCK OPTION? A stock option gives an employee the right to buy shares in the future at the market price on the date a grant is approved. If the stock rises, exercise, sell and make a profit. Grant date – June 30 >> $10.00/share market price 1,000 options granted, vesting over 4 years All exercised at the end of Year 4 >> employee pays $10,000. Sold on the same day, $25.00/share >> employee receives $25,000 Gain >> $15,000 What is BACKDATING?:  What is BACKDATING? Backdating is selecting a date prior to the actual grant when the stock price was lower, thus increasing the award's value. Grant date – June 30 >> $10.00/share market price “Backdated” grant date – May 19 >> $6.00/share 1,000 options granted, vesting over 4 years All exercised at the end of Year 4 >> employee pays $6,000. Sold on the same day, $25.00/share >> employee receives $25,000 Gain >> $19,000 Types of Stock Option Backdating:  Types of Stock Option Backdating Paperwork missing from corporate files Grant date unclear due to unanimous consent Company policy to give lowest or average price during a period Backdating to attract a new employee with in the money options; to sweeten a deal Backdating to enrich value for all employees Backdating to enrich value for management Creating false paperwork to justify options How Was Backdating Detected?:  How Was Backdating Detected? Academics, analysts and news organizations. The WSJ won a Pulitzer Prize for its investigative reporting, which began in March 2006 – The Perfect Payday Affiliated Computer Services CEO - all six of his stock-option grants from 1995 to 2002 were dated just before a rise in the stock price, often at the bottom of a steep drop. Just lucky? A Wall Street Journal analysis suggested the odds of this happening by chance are extraordinarily remote -- around one in 300 billion. The odds of winning the multistate Powerball lottery with a $1 ticket are one in 146 million. Maybe insider trading? No, the SEC eventually came to "an increasing realization that the companies were in fact lying about the timing of the grants." V-Charts – “The pictures were telling us a story” - WSJ:  V-Charts – “The pictures were telling us a story” - WSJ Who was doing it?:  Who was doing it? 140 Companies under Federal investigation; 70 executives lost jobs and 10 face federal or state criminal charges. Numerous SEC investigations. KLA-Tencor – Settled with 3 city/state pension plans for $65 million Brocade – Settled with the SEC for $7M and CEO Greg Reyes convicted and sentenced to 21 months in prison Monster Worldwide – Deferred prosecution for terminally ill former CEO Apple, Inc.:  Apple, Inc. “Although the investigation found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, he did not receive or financially benefit from these grants or appreciate the accounting implications. The Special Committee also found that the investigation had raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants.” – 2006 Annual Report Why Was it Done?:  Why Was it Done? Intense competition for employee talent Non-cash – nobody cares and nobody gets hurt Everyone else does it Who should be punished?:  Who should be punished? CEO who directed it be done CFO who knew it was being done General Counsel who knew it was being done VP Human Resources who processed the paperwork Individuals who benefited from the backdated options What punishment is appropriate?:  What punishment is appropriate? Who should be fired? CEO, CFO, Gen Counsel, VP HR, Compensation manager who processed it? Legal Penalties: None – victimless crime; just fine the company for back taxes and penalties? Personal fines for individual who ordered it done? Jail for individual who ordered it done? Personal fines or jail for person who did backdating paperwork? Personal fines or jail for “gatekeepers” who knew it was being done (CFO, GC, HR etc)? What should we learn from the backdating scandal?:  What should we learn from the backdating scandal? “Bubble” periods are ethically risky Correct accounting is always worth the time Tax manipulation and fraud -- is fraud Falsifying documents is particularly dangerous –Obstruction of justice is worse than the act itself “Gatekeepers” are expected to stand up for what is right CEOs and others can go to jail for fraud Other…………

Related presentations


Other presentations created by Carlton

Consumer
19. 11. 2007
0 views

Consumer

first06b
02. 10. 2007
0 views

first06b

Nyberg yeast
08. 11. 2007
0 views

Nyberg yeast

udd
10. 12. 2007
0 views

udd

Lab Setup
05. 11. 2007
0 views

Lab Setup

3 MOVE
06. 11. 2007
0 views

3 MOVE

drire
15. 11. 2007
0 views

drire

KRISTAL2006 04
20. 11. 2007
0 views

KRISTAL2006 04

DHCREALV2
22. 11. 2007
0 views

DHCREALV2

modern slow dance
23. 11. 2007
0 views

modern slow dance

Ethnic Geography Part II
23. 11. 2007
0 views

Ethnic Geography Part II

P Naming Elephants Presentation
26. 11. 2007
0 views

P Naming Elephants Presentation

ancientrome
31. 10. 2007
0 views

ancientrome

FarmtoBusiness
27. 12. 2007
0 views

FarmtoBusiness

Polymorphism
31. 12. 2007
0 views

Polymorphism

pruning avon landscape school
03. 01. 2008
0 views

pruning avon landscape school

Clinical
04. 01. 2008
0 views

Clinical

5 Unit 12
04. 01. 2008
0 views

5 Unit 12

WhittakerPaper
07. 01. 2008
0 views

WhittakerPaper

CEROS TechEnterprise 2005
07. 01. 2008
0 views

CEROS TechEnterprise 2005

ISU Trondheim 2006
07. 12. 2007
0 views

ISU Trondheim 2006

Parks Decsion Tree
28. 11. 2007
0 views

Parks Decsion Tree

deussen
02. 01. 2008
0 views

deussen

Onion handout only2006
07. 11. 2007
0 views

Onion handout only2006

SalahuddinAminuzzaman
25. 12. 2007
0 views

SalahuddinAminuzzaman

1 2006 parasitology definitions
24. 10. 2007
0 views

1 2006 parasitology definitions

mktrec
24. 02. 2008
0 views

mktrec

voyager tutorial
27. 02. 2008
0 views

voyager tutorial

MP10SpecialRelativit y2
06. 11. 2007
0 views

MP10SpecialRelativit y2

Maher Creativity 2007 08 14
28. 11. 2007
0 views

Maher Creativity 2007 08 14

Lifeline v4c
31. 10. 2007
0 views

Lifeline v4c

Travel Health
27. 03. 2008
0 views

Travel Health

Musical 1
02. 11. 2007
0 views

Musical 1

Outline2
13. 11. 2007
0 views

Outline2

wac2004ronblum
13. 04. 2008
0 views

wac2004ronblum

Agrofuels Driving Climate Change
26. 11. 2007
0 views

Agrofuels Driving Climate Change

2007 05 09bbh download
26. 10. 2007
0 views

2007 05 09bbh download

Bartenders Karen Palmersheim
11. 12. 2007
0 views

Bartenders Karen Palmersheim

Dynamic Licensing
06. 11. 2007
0 views

Dynamic Licensing

jose nov 04
30. 10. 2007
0 views

jose nov 04

1183379282 IIIA N S results
26. 10. 2007
0 views

1183379282 IIIA N S results

CLS Euro pres
02. 01. 2008
0 views

CLS Euro pres

cours5
01. 11. 2007
0 views

cours5

Homestake DOSSECC 6 2006b
03. 12. 2007
0 views

Homestake DOSSECC 6 2006b

ritt
29. 10. 2007
0 views

ritt

true fri pps2
28. 12. 2007
0 views

true fri pps2

27 Piro ops
30. 10. 2007
0 views

27 Piro ops

KUS5 trebilcock
01. 12. 2007
0 views

KUS5 trebilcock

Subsea experience 1
07. 11. 2007
0 views

Subsea experience 1

pred desvios
28. 12. 2007
0 views

pred desvios

Eric Van Heck
12. 12. 2007
0 views

Eric Van Heck