Legal and accounting issues of manipulating the timing of stock option grants

Abstract

PurposeMany corporate managers, with the aid of the board of directors, discovered that they could provide themselves with guaranteed or excessive compensation by manipulating the terms of stock option grants that were included in their compensation packages. This paper seeks to examine the legal, tax, and accounting issues that have evolved because of these suspect illegal activities.Design/methodology/approachThe author presents the theory behind performance‐based compensation that is the basis for employee stock option grants. The author then examines regulations, judicial theory, and court cases to determine the current legal status of backdating, spring loading, or bullet dodging of executive stock option grants.FindingsThe current legal environment has made it difficult for executives to continue the practice of manipulating stock option grants without falling under the ire of regulators and shareholders. However, a question remains whether executives that manipulated stock option grants in the past will be found criminally liable for their acts.Practical implicationsThe paper's review of the discourse on the legality of corporate executives enhancing their compensation packages shows the complexity of detecting and regulating this type of suspect activity.Originality/valueThis paper presents a contemporaneous discussion and data on legal and regulatory changes that resulted from management malfeasance of executive compensation.

An embezzler test for norms, standards and regulations

“…We do not test whether a particular norm, standard or regulation has been, or will be abused for embezzlement motives, but rather whether the norm, standard or Test for norms, standards and regulations regulation can facilitate the abuse of trust without being subject to detection or an applicable sanction. Several examples of abuse can be cited, such as creative accounting (Gupta and Kumar, 2020;Lokanan, 2019), using actual economic norms for the diversion of funds through the payment of non-legitimate bonus and dividends obtained out of inflated profits (Crutchley et al, 2007;Ndzi, 2019;Oppenheimer, 2011;Young, 2020), or abusive tax avoidance through cost inflation to reduce taxable income, or the transfer of assets to countries with lower tax regimes with the adoption of abusive transfer prices (Autenne et al, 2018;Beer et al, 2021;Bridges, 1997;Peacock, 1997;Quentin, 2016;Riedel, 2018). To be clear, we are not claiming that all these abuses are related to specific standards, norms or regulations, but rather, we are evaluating whether specific standards, norms and regulations can facilitate the occurrence of embezzlement.…”

Financial Fraud: A Literature Review

“…Apart from triggering regulatory and legal investigations, the media attention also brought the role of external auditors and the independency of boards of directors into question. The US federal government, through the SEC and the Internal Revenue Service (IRS), responded to the episode by enacting several security and tax laws that, although not making the practice illegal by definition, were intended to make it more difficult for corporate managers to manipulate stock option dates without facing tax implications or being subjected to close scrutiny by their shareholders (Oppenheimer 2011).…”