In the mid-2000s, an investigation by the U.S. Securities and Exchange Commission (SEC) resulted in the resignations of more than 50 senior executives and CEOs at firms ranging from restaurant chains and recruiters to homebuilders and healthcare. Apple Inc. (AAPL), UnitedHealth Group Inc. (UNH), Broadcom Inc. (AVGO), Staples, The Cheesecake Factory Inc. (CAKE), KB Home (KBH), Monster Beverage Corp. (MNST), Brocade Communications Systems, Vitesse Semiconductor, and dozens of lesser-known technology firms were implicated in the scandal.

What was it all about? 澳洲幸运5官方开奖结果体彩网:Options backdating.

Read on to find out how the scandal emerged, what brought it to an꧒ end, and what we can learn from it now.

Options Backdating

The options backdating scandal revealed a widespread practice of executives manipulating stock option grant dates to increase their compensation while deceiving regulators, shareholders, and the IRS. The roots of this scandal were in a 1972 accounting rule that allowed companies to avoid recording executive compensation as an expense on their income statements. This loophole applied to stock options granted at the market price on the day of issue, known as "澳洲幸运5官方开奖结果体彩网:at-the-money" grants. As a result, companies could offer substantial compensation packages to senior executives without disclosing them fully to shareholders.

While these grants gave executives significant stock holdings, the share price had to appreciate before they could profit. A 1993 amendment to the tax code inadvertently created an incentive for executives and their employers to engage in 澳洲幸运5官方开奖结果体彩网:backdating. This amendment classified executive compensation exceeding $1 million as unreasonable and not tax-deductible for the company. However, performance-based compens💫ation remained deductible.

At-the-money options qualify as performance-based compensation since share prices have to go up to be profitable. This made the options eligible for corporate tax deductions. Executives soon realized they could retroactively choose a date when their company's stock was at its lowest price and pretend that was the grant date. This practice guaranteed 澳洲幸运5官方开奖结果体彩网:in-the-money (profitable) options.

In fact, the manipulation allowed executives to cheat the IRS twice: once for themselves, as capital gains are taxed at a🎃 lower rate than ordinary income, and once for their employers, who could claim larger tax write-offs. The practice became so wi🎃despread that some investigators believe 10% of nationwide stock grants were issued under these pretenses.

The Scandal Comes to Light

A series of academic studies brought the backdating scandal into the public eye. The first was in 1995, when a professor at New York University reviewed option-grant data that the SEC forced companies to publish. The study, published in 1997, identified a strange pattern of extremely profitable option grants, somehow perfectly timed to coincide with dates on which the shares were t🀅rading at a low.

A series of two follow-up studies by professors elsewhere suggested that the uncanny ability to time options grants could only have happened if the granters had known the prices in advance. A Pulitzer Prize-winning story published in the Wall Street Journal finally blew the lid off the scandal.

As a result, firms 澳洲幸运5官方开奖结果体彩网:restated earnings, fines were paid, executives lost their jobs, and the corporate world appeared to the public to be going to any lengths to hide the many millions it pays its executives. The SEC reported that investors suffered more than $10 billion in losses because of share price declines and stolen compensation.

Unsung Role of♊ Academic Researchers in Uncovering Corporate Malfeasance

Academics have played a crucial role in uncovering several other financial scandals. Here are just a few notable example༺s:

Enron Scandal (2001): Academic researchers, particularly graduate students and their professors at Cornell University, questioned Enron's accounting practices and financial statements long before the company's collapse. Their analysis of public filings raised red flags about the company's use of special purpose entities and off-balance-sheet financing.

Mutual fund market timing scandal (2003): Finance professors at Stanford and the University of Virginia uncovered widespread illegal late trading and market timing practices in the mutual fund industry. Their research led to a major investigation by New York Attorney General Eliot Spitzer.

LIBOR manipulation Scandal (2008-2012): Academics from Bocconi University and Pompeu Fabra University published papers suggesting manipulation of the London Interbank Offered Rate (LIBOR) as early as 2008, years before regulators took action.

Volkswagen emissions scandal (2015): The scandal was initially uncovered by researchers at West Virginia University who discovered discrepancies between Volkswagen's stated emissions and actual performance during road tests.

These examples highlight the critical role that academic research can play in identifying and expo🐬sing corporate malfeasance, often before regulators or journalists become aware of the issues.

The Bottom Line

In the early 2000s, new accounting provisions were enacted that required companies to report their option grants within two days of their issue and required that all stock options be listed as expenses. These ch🍃anges reduced the likelihood of future backdating inciden🍬ts.