The SEC has announced it’s going to be including companies’ external auditors in their inves­ti­gation into options timing abuses commonly known as backdating.

Author­ities were said to be looking at what auditors knew about company manip­u­lation of options’ grant dates and exercise prices to boost their value to execu­tives who got them. About 30 companies are known to be involved in the largest multi-agency probe into corporate wrong­doing in two years, with fraud and insider trading charges seen as possible outcomes.

The SEC typically expands its inves­ti­ga­tions beyond corporate execu­tives immedi­ately involved to look at auditors, directors, lawyers and others who may have known about the misconduct or been in a position to halt it.

Ah, corporate gover­nance. The hot topic gets hotter. Corporate gover­nance to Chartered Accoun­tants is basically an issue of organi­za­tional effec­tiveness. Audit committees doing their job. Boards doing their job. Every­thing running smoothly from a company’s health point of view. But when securities regulators are involved, it’s all about making sure they didn’t let the execu­tives get away with something that isn’t in the investors’ best interests.

Backdating involves retroac­tively dating the grant and exercise price of an options issue to precede a rally in the under­lying shares, maximizing option profits for execu­tives. The practice can pose disclosure, tax and accounting problems.

Spring-loading involves looking forward to set the grant date and exercise prices ahead of the release of positive news expected to raise share values, also boosting option profits.

Origi­nally I’d thought the issue with backdating was reducing their value at the grant date, thereby reducing the expense the company reports on their income statement. But I guess I was wrong. It is appar­ently even more insidious than boosting the company’s profits! This is about putting more cold, hard cash in execu­tives’ pockets.

(Via the AAO Weblog.)