Restricted stock backdating
Finally, discount options cannot qualify for the favorable tax treatment provided for incentive stock options.
The foregoing tax consequences could be affected by applicable statutes of limitations, may include additional reporting and withholding obligations, and may affect the financial accounting for taxes related to the options.
From our perspective, the key question (and distinguishing characteristic) between technical errors and more serious issues is whether the board of directors or the compensation committee knowingly approved the terms of stock option grants and the prices at which the options were exercisable.
SEC, Department of Justice, and IRS Investigations/Proceedings.
One of the most immediate issues facing many companies is the possibility of civil and criminal investigations initiated by the SEC, the Department of Justice, and/or the Internal Revenue Service.
In connection with announcing the charges, SEC chairman Christopher Cox stated that “options backdating strikes at the heart of investor confidence in our capital markets [and] . An immediate risk facing some companies under investigation is the potential restatement of historical financial statements resulting from the failure to record compensation expense with any backdated options.
Under the long-standing APB 25 accounting standards (which have been superseded by FAS 123R), compensation expense for option grants needed to be recorded only if the exercise price was less than the fair market value of the underlying stock at the date of the option grant – so-called discount options.