Definition of backdating stock options
The date chosen could be one when the company’s stock was at a low, so the options can be in-the-money at the time of granting itself.
The practice is illegal if it is not followed by proper disclosure and related expenses are not recorded in financial statements.
In the context of mutual funds, a feature allowing fundholders to use an earlier date on a letter of intent to invest in a mutual fund in exchange for a reduced sales charge, e.g.
Giving retroactive value to purchases from the earlier date.
In our example, backdating the options is the same as giving Jane Doe a check for ,000.
If the company does so without recording that ,000 on the income statement as compensation, it understates its expenses and overstates its profits, which is a violation of generally accepted accounting principles (GAAP) and has been the grounds for a variety of fraud and miscellaneous charges from federal, state and local regulators.
Management accountants are in a position to help their companies address a number of factors that could help prevent a backdating scandal investigations and shareholder derivative lawsuits sweeps through the D&O industry, this is a good time to step back, consider what is at stake in these cases, and anticipate some of the D&O coverage issues that will implicated by settlements of these cases.For instance, if the board meeting is on January 3, 2020, and Company XYZ stock closes at per share that day, then the exercise price of Jane's 2020 stock option grant is per share.That is, she has the right, but not the obligation, to purchase 1,000 shares of Company XYZ stock for per share.For example, if one signs a contract on February 1, one may backdate it to January 31.Backdating is usually illegal; for example, one may use backdating to evade taxes.