Fraud Versus Ethics: The Case Of The Backdating Of Stock Options

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Huldah A. Ryan
William Bottiglieri
Steven L. Kroleski

Keywords

Stock options, executive compensation, corporate governance, fraud, ethics

Abstract

During the past five years, the Securities and Exchange Commission (SEC) has investigated over 140 companies for their practices of backdating the grant dates of employee stock options (ESOs), and has cited a number of these companies for their part in this behavior that has led to huge financial losses to corporate stockholders.  The practice of backdating stock options grant dates is not necessarily illegal, but there may be some ethical issues involved with respect to the firms implicated in the acts.  Options backdating may arise, not only because of clerical errors, lax record keeping, or internal control system failure, but also because of the intentional manipulation of corporate reports and documentation.  In cases where top executives deliberately manipulate stock options grant dates to further bloat their excessive compensation packages above the amounts that directors approved for them, the firm and its officers/directors may be liable for violations of SEC disclosure requirements, generally accepted accounting principles (GAAP), and tax laws, and if these actions occurred after the passage of the Sarbanes-Oxley Act of 2002, there could be severe penalties imposed on the firm and on the individuals involved.

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