Stock options backdating issue

Because compensation expense is recorded over the vesting period of the option (generally four years), a single occurrence of improper dating could result in the restatement of several years of financial statements.

Backdating results in an option already being in the money at the time of the grant.

Such a grant also could create withholding obligations for the company and possible liability for failure to withhold.

In addition, if the stock option was intended to be an incentive stock option, improper dating could disqualify the option from the favorable tax treatment ordinarily accorded that type of option. Under Section 16 of the Securities Exchange Act of 1934, executive officers are required to report the grants of stock options on forms they file with the SEC.

A number of commentators have suggested that there may be other circumstances under which option grant dates may be open to question, including grants made by use of unanimous written consents.

These circumstances do not appear to be the focus of the recent articles and research reports, and their possible consequences are currently subject to considerable debate.

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If your company has been publicly identified as one with a risk of backdating problems, you should consider carefully reviewing the grants identified as suspect to determine if there is any merit to the suspicions.

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