That, in turn, understates the company's expenses and overstates its profits, which is a violation of generally accepted accounting principles and has been the grounds for a variety of fraud and miscellaneous charges from federal, state and local regulators.
As a result, regulations in the Sarbanes-Oxley Act require companies to report option grants to the Securities and Exchange Commission within two business days.
When company executives discovered that they had the ability to backdate stock option grants, thus making them both tax deductible and “in the money” on the date of actual issuance, the common practice of stock option backdating for financial gain began on a widespread level.
The problem with this practice, according to the SEC, was that stock option backdating, while difficult to prove, could be considered a criminal act.
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.
Cases of backdating employee stock options have drawn public and media attention.
If, however, Company XYZ decides to backdate the options, it could change the paperwork to state that it actually granted those stock options to John on, say, June 15, 2008, when the stock was only trading at per share.This is important to note, because the grant date is what determines the exercise price on the options.For instance, if the board meeting is on January 3, 2012, and Company XYZ stock closes at per share that day, then the exercise price of John's 2012 stock option grant is per share.Stock prices change, however, and there is no guarantee that any stock price will ever be above the exercise price.
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.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.