Accounting for a Detoured Economist

Don’t expect a lot of posts for the next month. I will write when I can. Check back in the middle of December.

What is options backdating?

Stock options are used to attract and retain employees, usually management positions. Companies give employees the right to purchase a set number of shares at a fixed price over the course of some period of time…usually a few years. The price is generally where the stock trades when the options are granted.

When the date of the option is not set at the time the option was granted, usually to make a larger profit, this is what is commonly known as backdating.

According to a recent article in Fortune Magazine there are three distinct forms of options backdating…

Time-travel grants: Also known as backdated or “look-back” options, and almost certainly illegal.
Someone chooses a date earlier than when the options were approved because the stock has since run up. Doing that lowers the exercise price of the options so grantees can enjoy a bigger haul.

These are the goodies that Amnon Landan, the CEO of the software company Mercury Interactive (Charts), allegedly awarded himself and other employees. (Mercury’s board has since fired Landan.)

Forward-dating, springloading, bullet-dodging: These schemes involve looking forward rather than looking back.
Some companies purposely adopted policies that priced options at a future low point in the stock. Others “springloaded” their grants by awarding them just before good news hit (boosting the stock) or engaged in “bullet-dodging” by holding off on grants until after releasing bad news so employees would get lower-priced options.

If companies followed disclosed policies and properly accounted for them, it’s unclear they’ve violated the law, no matter how unseemly the practices may appear.

Honest screwups: Options could be mispriced, says Grundfest, simply because a director was slow to sign a document, resulting in a grant date that’s different from what the board intended. Hey, it happens.

Jack Ciesielski at AAO Weblog has been doing a bang-up job documenting this burgeoning scandal. I will not try and recreate his blog documentation. My question is mainly in regards to how soo many companies thought that the practice of backdating was acceptable behavior. I can’t for the life of me understand how no one at any of the hundred public company’s involved in this scandal stood up and blew a whistle or noted the obvious illegality of sating stock options for maximum profit for a chosen few executives without disclosure to the rest of the stockholders.

Seriously, can someone explain how this practice was justified?

Read more here, here, here, here, and here.

Sometimes I get the feeling that no matter how much attention I put into an audit workpaper, I will still always get a review note nitpicking at some unknown detail that has never been questioned in all of the previous years we audited the exact same client. Furthermore, I think it is not optimal to try and avoid review notes. The theory being that you can spend hours on one workpaper trying to anticipate every possible area that could be questioned and document the hell out of that workpaper in the hopes that you have thought of everything…or…you could do a quick and dirty workpaper covering the basics, turn in the workpaper, get your review notes, and just address those notes. 9 times out of 10 you will spend much less time addressing those review notes then you would have spent trying to think of every way you could possibly try to avoid review notes.

Makes sense, doesn’t it?

P.S.: Why doesn’t Microsoft Word recognize workpaper as a word….arggggh…it is not misspelled!

Michelle Golden, over at Golden Practices, wrote an entry a few days ago about talent shortages being a firm’s fault and wrote the following

…I want to scream aloud when I see firms focusing intently on micromanaging stupid things like cell phone policies, dress codes and, yes, grooming policies! Good God! If we are having to tell people to bathe and comb their hair, we aren’t hiring great people.

These sorts of policies underscore the firms’ lack of trust of their knowledge workers. The very existence of these policies in firms draw attention to the lack of alignment between who they are and what they want.

And if we are hiring great people and telling everybody, across the board, exactly how to dress or groom because one person can’t get it right, then we don’t deserve all those other great people. Frankly, if one person struggles to be appropriate in personal appearance, and we write a “Policy” because we’re too chicken to coach them individually, then we get what we deserve when we demoralize everyone who is not the problem.

If we refuse to equip people with cell phones so that we and our clients can reach them (accessibility is still a good thing, right?) then what does that say about the firm’s commitment to service? Seriously, how much does a cell-phone cost? What is the cost of inaccessibility?

Where is the firm walking its talk?

Morale in firms is bottom of the barrel low. Adding health club or vision benefits isn’t going to solve the problem. Adding petty policies to micromanage knowledge workers is another slap in the face.

As someone who just came from a company that monitored all email and web activity to the point that they could have a conversation with you about everything that was discussed in your email, I can attest to how big an annoyance an unfounded lack of trust can be.

My current job has completely blocked all chat services, and in the process has also blocked gmail (because it has an embedded chat service). Although I understand the desire to stop unproductive chat, it seems silly to me to take away a valuable tool for most because a few bad apples abuse the privilege. I say fire the abusers and let the rest of us use the tools available to us to be as productive and happy as possible while working 50+ hour work weeks.

Read more about this subject here, here, and here.

I have updated my links on the sidebar. Take a click.