Backdating a check

Granting stock options to employees is a generally accepted and perfectly legal form of compensating employees. Critics of backdating argue that the practice is difficult to detect and thus encourages boards and executives to use it to synthesize more creative compensation packages.

In our example, backdating the options is the same as giving John Doe a check for ,000 -- without recording that ,000 on the within two business days.

Typically, the grant date of the stock options is the same as the date of the board meeting.

This is important to note, because the grant date is what determines the exercise price on the options.

Those options give John the right but not the on the date of the grant.

The board formally grants the stock options to John every year at its January board meeting.

Two days after the Securities and Exchange Commission issued executive-pay-disclosure rules mandating that corporations report on the backdating of stock-option grants, the Public Company Accounting Oversight Board issued guidance to auditors on the same subject.

In putting out Friday’s guidance, the PCAOB sounded the alarm for independent auditors to be on the lookout for backdating and other finagling related to the reporting of options-related costs in their clients’ financial statements.

The practice sometimes also occurs in the insurance industry, whereby policy issuers make the effective date of a policy (or claim) earlier than the application date in order to obtain a lower premium for the customer (or obtain better claim results). When he was hired, the Company XYZ board of directors offered John an attractive salary as well as an annual grant of 1,000 Company XYZ stock options.Backdating more than 31 days/1 month There are two situations in which it is possible to get backdating of more than 31days/1 month: Refugee status If a person has claimed asylum as a refugee and is then awarded refugee status, providing they apply for tax credits within one month of receiving notification of that refugee status, they will be treated as if they made their tax credits claim from the original date they claimed asylum.Prior to 6 April 2012, refugees had 3 months from being awarded refugee status to inform HMRC and receive longer backdating.The commission’s final rule and the accounting board’s alert “were nearing completion around the same time, and it made sense to release them at the same time,” he says.In its alert, the PCAOB warns independent auditors that backdating has already resulted in restatements and could spawn illegalities that might require companies to recognize added expense in their financials.For instance, if the board meeting is on January 3, 2012, and Company XYZ stock closes at per share that day, then the exercise price of John's 2012 stock are backdated, then his exercise price is only per share.

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