CandleFocus Glossary Editor
Options backdating is a practice that allows companies to issue stock options at a lower exercise price than the current market price of their stock. This practice makes the options more valuable to their recipients, enabling them to make larger profits. Options backdating is considered to be an unethical or illegal practice since it abuses the trust in the process of awarding stock options to employees and exploits the company and its shareholders for the personal gain of a few select individuals.
Although backdating options has been considered to be an unethical practice for many years, it wasn’t until 2002 that the US Congress passed the Sarbanes-Oxley Act to regulate the practice and reduce corporate fraud. Now, companies are required to report option grants to the Securities and Exchange Commission (SEC) within two business days to prevent backdating and make options awarding more transparent.
The act also prohibits backdating contracts and requires that companies accurately record the date of the options granting. In the event that backdating is suspected, the SEC may investigate and take enforcement action which can include civil penalties and criminal prosecution.
Options backdating is controversial because it allows executives to essentially create their own compensation packages, often at the expense of shareholders. By granting options at lower prices, executives are able to make large profits when the stock prices increase. They are essentially able to create a "free lunch" where they make profits without assuming personal risk or committing their own funds.
In conclusion, options backdating is a practice that can be unethical and subject to legal and regulatory enforcement. Companies can no longer use the practice to grant options to executives at unrealistic prices thanks to the Sarbanes-Oxley Act. By reporting option grants to the SEC and keeping accurate records, companies can ensure that any backdating practices are not taking place in their company.
Although backdating options has been considered to be an unethical practice for many years, it wasn’t until 2002 that the US Congress passed the Sarbanes-Oxley Act to regulate the practice and reduce corporate fraud. Now, companies are required to report option grants to the Securities and Exchange Commission (SEC) within two business days to prevent backdating and make options awarding more transparent.
The act also prohibits backdating contracts and requires that companies accurately record the date of the options granting. In the event that backdating is suspected, the SEC may investigate and take enforcement action which can include civil penalties and criminal prosecution.
Options backdating is controversial because it allows executives to essentially create their own compensation packages, often at the expense of shareholders. By granting options at lower prices, executives are able to make large profits when the stock prices increase. They are essentially able to create a "free lunch" where they make profits without assuming personal risk or committing their own funds.
In conclusion, options backdating is a practice that can be unethical and subject to legal and regulatory enforcement. Companies can no longer use the practice to grant options to executives at unrealistic prices thanks to the Sarbanes-Oxley Act. By reporting option grants to the SEC and keeping accurate records, companies can ensure that any backdating practices are not taking place in their company.