SEC looking into auditors in options backdating investigation

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.)

2 thoughts on “SEC looking into auditors in options backdating investigation

  1. Well, for case writing purposes, don’t forget the importance of corporate governance and its relation to controls. Ah, all those cases where some subsidiary is managed by larcenous types with no oversight. I’m sure there’ll be more of those to write in the coming weeks, eh?

    Oh wait, you just talked about a real life example of the same thing. And by real life, we just mean “with a little more nuance”.

    BTW, please note my new blog address

  2. Yes, how could I forget. Controls! I bet there will be lots of discussion about this in the coming weeks.

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