Clearly, for those who own shares in companies that don't play by the rules, options backdating poses serious risks.If the company is punished for its actions, its value is likely to drop substantially, putting a major dent in shareholders' portfolios.(To learn more, see .) Cost to Shareholders The biggest problem for most public companies will be the bad press they receive after an accusation (of backdating) is levied, and the resulting drop in investor confidence.While not quantifiable in terms of dollars and cents, in some cases, the damage to the company's reputation could be irreparable.Smart Pros offers a blended-array of live and online solutions for individuals and organizations.Access hundreds of accounting- and finance-related accredited courses through our online courseware.(For more insight, see ) Although it may appear shady, public companies can typically issue and price stock option grants as they see fit, but this will all depend on the terms and conditions of their stock option granting program.However, when granting options, the details of the grant must be disclosed, meaning that a company must clearly inform the investment community of the date that the option was granted and the exercise price. In addition, the company must also properly account for the expense of the options grant in their financials.
The total cost to shareholders, in this case, has been staggering.
On the surface - at least compared to some of the other shenanigans executives have been accused of in the past - the options backdating scandal seems relatively innocuous.
But ultimately, it can prove to be quite costly to shareholders.
(To learn more, read .) In short, it is this failure to disclose - rather than the backdating process itself - that is the crux of the options backdating scandal. To be clear, the majority of public companies handle their employee stock options programs in the traditional manner.
That is, they grant their executives stock options with an exercise price (or price at which the employee can purchase the common stock at a later date) equivalent to the market price at the time of the option grant.
Another potential ticking time bomb, is that many of the companies that are caught bending the rules will probably be required to restate their historical financials to reflect the costs associated with previous options grants. In others, the costs may be in the tens or even hundreds of millions of dollars.