Options backdating is simply granting an employee stock options that is dated prior to the date that the company actually granted the option .This generally means that the value of the stock option is set to less than the fair market value thus deceiving shareholders and potential shareholders and dealing out an unfair advantage and profit to certain favored individuals While backdating may not necessarily be illegal it is virtually impossible to backdate options and achieve its ultimate aim of making money without falsifying records and documents hence misleading shareholders and other interested parties , which comes under the clear heading of accounting fraud .Scandals from stock frauds to backdating scandals rule in stock markets and the lure of the lucre really tells in the stock market .
Academic researchers had long been aware of the pattern, exhibited by some companies, of share prices rising dramatically in the days following grants of stock options to senior management.
However, in late 2005 and early 2006, the issue of stock options backdating gained a wider audience.
Whether backdating options by some of its top executives is ethical still remains debatable and there are many gray areas that still need to be dealt with .
However this scandal has had a long term effect on the company and it is still recovering from the blow that it suffered during the investigations and subsequent convictions of its executives .
Additionally, companies can use backdating to produce greater executive incomes without having to report higher expenses to their shareholders, which can lower company earnings and/or cause the company to fall short of earnings predictions and public expectations.
Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required.
The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options vs.
the much different – and more financially beneficial – tax rules that apply when issuing “at the money” or "out of the money" stock options.
In 1994, a new tax code (162 M) provision declared all executive income levels over one million dollars to be “unreasonable” in order to increase taxes on all applicable salaries by removing them from their previous tax deductible status 4.