Stock Option Backdating

The following is a paper I coauthored in December 2006 for a Seminar in Management Control Systems while completing my Masters of Science in Accounting & Taxation at the University of Hartford. Given the recent resurgence of news relating to options backdating, I thought I’d reprint the paper for those who might be interested.

Executive Summary
Stock option backdating is a complex issue. While there are legal ways to backdate stock options, as we found, few companies can properly account for backdated options. As a result, we found that many companies lose top talent, are scrutinized by regulatory bodies, and are subject to fines and penalties. The negative effects on shareholder value are significant cause for concern. Ultimately, the potential gain executives’ reap is far outweighed by the likelihood of detection. Nonetheless, stock option backdating is a prevalent practice. The statistics can be staggering: $5.9 billion in fines, more than 120 companies under investigation. In the coming pages, the history, legal issues, and effects on shareholder value will be explored.

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