Apple stock option backdating scandal

6854933580_2c8b688306_z

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.

This is a way of repricing options to make them valuable or more valuable when the option "strike price" (the fixed price at which the owner of the option can purchase stock) is fixed to the stock price at the date the option was granted.

In 1972, a new revision (APB 25) in accounting rules resulted in the ability of any company to avoid having to report executive incomes as an expense to their shareholders if the income resulted from an issuance of “at the money” stock options.

In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.

Cases of backdating employee stock options have drawn public and media attention.

According to a study by Erik Lie, a finance professor at the University of Iowa, more than 2,000 companies used options backdating in some form to reward their senior executives between 19.

The report caps a week that will probably be remembered as a milestone in the apotheosis of Steve Jobs.

Still, it appears as though Jobs has sought independent counsel beyond Apple's lawyers in dealing with the matter.

That’s 85% above the 47 cents a share in the year-ago quarter and 36% above the consensus forecasts among analysts.

This is a textbook case in a blowout earnings report and reason to wonder why analysts bother with Apple estimates.

This fact is often used as a reason to downplay the seriousness of the issue.

You’d think that shareholders wouldn’t tolerate the use of accounting sleight of hand to compensate executives while bypassing the traditional “selling, general, and administrative” line in the income statement.

Thursday will mark a red-letter day for Apple: For the first time its stock will rise above 0 a share, a tenfold increase in a little more than three years.

You must have an account to comment. Please register or login here!