Backdating of stock option

But if these conditions are not met, a number of negative consequences can result, depending on the individual circumstances of the practice at issue.

Options that are granted at less than fair market value result in higher levels of compensation expense.

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The discovery of past backdating practices may raise issues as to the adequacy of the company’s internal controls and disclosure controls and procedures.Several companies have expressed their intent to restate financial statements due to option timing issues, and opportunistic attorneys have already filed derivative and class action lawsuits.The author of the academic study who is credited with focusing regulators on this issue estimates that at least 10% of “at-the-money” grants of options to CEOs between 19—before Sarbanes-Oxley shortened the reporting period for option grants—were backdated.Options granted as of the date of employment acceptance are also troublesome if the plan does not permit grants to non-employees or if the additional tax and accounting issues relating to grants to non-employees are not adequately addressed.A company may decide to grant options on a specific date but the corporate formalities may not be completed until a later date.

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