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This means that corporations will have less time to backdate their grants or pull any other behind-the-scenes trickery.It also provides investors with timely access to (grant) pricing information.Beyond Sarbanes-Oxley, the SEC approved changes to the listing standards of the NYSE and the Nasdaq in 2003 that require shareholder approval for compensation plans.It also approved requirements that mandate that companies outline the specifics of their compensation plans to their shareholders.The Bottom Line Although more culprits in the options backdating scandal are likely to emerge, because standards such as Sarbanes-Oxley have been instituted, the assumption is that it will be more difficult for public companies and/or their executives to hide the details of equity compensation plans in the future.Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.In this litigious society, shareholders will almost certainly file a class-action lawsuit against the company for filing false earnings reports.In the worst cases of options backdating abuse, the stock exchange on which the offending company's stock trades and/or regulatory bodies such as the Securities and Exchange Commission (SEC) or National Association of Securities Dealers can levy substantial fines against the company for perpetrating fraud.
The well-known data storage company allegedly manipulated its stock options grants to ensure profits for its senior executives and then failed to inform investors, or to account for the options expense(s) properly.Clearly, for those who own shares in companies that don't play by the rules, options backdating poses serious risks.If the company is punished for its actions, its value is likely to drop substantially, putting a major dent in shareholders' portfolios.In order to lock in a profit on day one of an options grant, some executives simply backdate (set the date to an earlier time than the actual grant date) the exercise price of the options to a date when the stock was trading at a lower level. In this article, we'll explore what options backdating is and what it means for companies and their investors. Most businesses or executives avoid options backdating; executives who receive stock options as part of their compensation, are given an exercise price that is equivalent to the closing stock price on the date the options grant is issued.This means they must wait for the stock to appreciate before making any money.
They also fully disclose this compensation to investors, and deduct the cost of issuing the options from their earnings as they are required to do under the Sarbanes-Oxley Act of 2002.