They played games with their accounting because they thought investors weren’t smart enough to look at the fundamentals.They were “managing earnings,” massaging the numbers, something that many (perhaps most) companies do in some form or other...However, companies must report their option grants within two days of their issue and list all stock options as expenses.To avoid backdating problems, be sure that your option-granting practices are consistent and well documented. But improper backdating may require restatements of earnings.Executives can enjoy instant profits, and they and the company can avoid some of the negative consequences typically associated with in-the-money options.Regulators recognize that legitimate discrepancies may exist between the date an option is granted and the date it’s finalized due to innocent administrative delays.Typically, the grant date of the stock options is the same as the date of the board meeting.
Companies have historically granted stock options “at the money,” meaning the exercise price is equal to the stock’s fair market value on the grant date.The most common stock options are known as “at the money” options, which let you buy the company’s stock at the price that it had on the day of the grant.They’re valuable only if the stock price rises after you get them.In the case of backdating, the only crime was the coverup. In-the-money options—but not at-the-money options—had to be recorded as an expense, which drove down reported earnings.Backdating allowed companies to reward employees with in-the-money options while getting the favorable accounting treatment of at-the-money options. Classifying the options properly would have lowered the number in the “earnings” box, and so C. O.s assumed that it would also drag down the company’s stock price.