Back dating of stock option
Increasing the consequences of corporate fraud is one way in which a company can discourage fraud.If Apple had developed a more strict punishment to anyone involved in financial misstatements, such as immediate dismissal from the company or the board, the participants in options backdating may have acted more carefully.An example illustrates the potential benefit of backdating to the recipient.The Wall Street Journal (see discussion of article below) pointed out a CEO option grant dated October 1998.(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.However, under the new FAS 123R, the expense is based on the fair market value on the grant date, such that even at-the-money options have to be expensed.) Because backdating is typically not reflected properly in earnings, some companies that have recently admitted to backdating of options have restated earnings for past years. The exercise price affects the basis that is used for estimating both the company's compensation expense for tax purposes and any capital gain for the option recipient.Certainly, as CFO, Anderson felt responsible and that is likely part of the reason that he was the first to resign in the scandal.
Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.Some firms have attempted to teach ethical behavior and instill an ethical corporate culture within their firms.This would have likely have been ineffective in preventing options backdating at Apple.The number of shares subject to option was 250,000 and the exercise price was (the trough in the stock price graph below.) Given a year-end price of , the intrinsic value of the options at the end of the year was (-) x 250,000 = ,750,000.In comparison, had the options been granted at the year-end price when the decision to grant to options actually might have been made, the year-end intrinsic value would have been zero.