Apple Investigated Over Stock Options

blamanj writes "Apple has joined the list of over fifty companies (most in Silicon Valley) that possibly mishandled stock options by backdating them. The technique is not illegal, but it can cause a company to improperly deduct employee compensation expenses and result in an underpayment of taxes. So far, Apple is conducting the investigation itself, but it has notified the SEC."

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Re:I'm investigating myself.

[Otter]

It's not (at the moment) illegal per se. It does lead to accounting, disclosure and tax improprieties if it's not reported.

In any case, the self-investigation does seem strange -- how could the company not know if it had been done? If they really don't know, I'd say that's an issue in itself.

Re:I'm investigating myself.

[geekoid]

It's not thaty strange. The accounting dept is probably many people. SOmeone may have made a mistake that went unchecked(maybe). Someone notices an oddity and starts an ivestigation. Since it involves stocks, and they want to minimize there risk, they notify the SEC.

Hardly the first company to do this. Probably not event the 10th company to do this this year.

Re:Sad

[Anonymous Coward]

Except he did not leave his children such things and encouraged the inheritance tax for the same reason: his belief that the wealth of the parent should not excuse the child from work for life.

Pathetic?

[Ruff_ilb]

In light of recent events [go.com], I think it's difficult to call Warren Buffet greedy or pathetic. As a self-made man, he lives remarkably frugally, and is exceptionally philanthropic. For more information, check the Wikipedia article on him.

Re:Bizarre article

[stick-boy]

This site: http://www.reed-electronics.com/electronicnews/art icle/CA6338353.html [reed-electronics.com] seems to have a pretty good sized list of companies and news on this topic. My company http://www.intuit.com/ [intuit.com] is also one of them and had a press release today http://www.businessweek.com/ap/financialnews/D8II3 R980.htm?sub=apn_tech_down&chan=tc [businessweek.com] saying that they have now been issued a subpoena after starting their own internal investigation over a month ago.

Re:I'm investigating myself.

[Fordiman]

Backdating options isn't illegal, per se. In fact, it used to be common practice to backdate stock option compensation to the beginning of the FY.

However, it has recently become illegal to offer stock options as compensation without expensing them (it used to not be - and a given company could reduce their taxes and inflate their bottom line by nonexpensing of stock options).

Because of this, if Apple's accounting was still backdating options after the new rules were passed, they would technically be exempt from expensing. The FASB would have one word to say to that: "Tax Fraud".

So basically, the audit process would have to go like this: If Apple's accounting accidentally backdated compensation options past the 'rules' line, then, without thinking about it (because there's usually so much going on, you'd normally only check the option date, not the signing date) failed to expense them, they have to correct the error, fix their earnings profile, and disclose the correction to their stockholders.

Ironically, Microsoft is one of a few tech companies who took care of this (ie: started expensing stock options) well before the new rules went into effect. I guess they figured they have enough legal problems.

Worst of all, backdating costs investors

[GringoGoiano]

When the employee exercises a stock option they are paying the company for the share. If the company back-dates an option to lower the strike price for an employee, the employee pays less for it.

Scenario:

• No back-dating:
     
  • 
       
  • company stock price 2006/07: $25
       
  • company stock price 2006/09 (stock grant date): $30, stock strike price set at $30
       
  • employee exercises/sells 1 share on 2010/09, current price $50: employee pays company $30, employee sells $50, $20 profit
       
  
  
• Back-dating:
     
  • 
       
  • company stock price 2006/07: $25
       
  • company stock price 2006/09 (stock grant date, but back-dated to 2006/07): $30, stock strike price set at $25
       
  • employee exercises/sells 1 share on 2010/09, current price $50: employee pays company $25, employee sells $50, $25 profit
       
  
  

The employee makes a bigger profit, the company loses. This is the worst
side-effect of back-dating stock options. You're cheating the other shareholders.

Re:Sad

[llf4nlp]

Accuracy lacking on this one:
Options that went to the CEO were cancelled, never used.
Get your facts straight, dude.

Re:Sad

[Anonymous Coward]

"Except he did not leave his children such things"

He most certainly did.

http://www.chicagotribune.com/business/chi-0606260 177jun26,1,3667425.story?coll=chi-news-hed [chicagotribune.com]

"The investor also is setting aside stock valued at $3.2 billion to provide about $1 billion to organizations headed by his three children."

Obviously that inheritance tax is only for us peasants whose children do not have their own tax shelter organizations to funnel money to.

You're confusing tax and accounting

[rmcd]

Tax and accounting are two different things. (Maybe they shouldn't be, but that's a different story.) The tax issue you're discussing isn't fraud, it's the way the compensation taxes are supposed to work. There is a different tax issue related to backdating. I will discuss it below and I suppose it could be described as fradulent.

Suppose an option gives an employee the right to buy $100 shares for $20. The right to do this is worth $80. When the employee exercises, the company gets a deduction for $80 and the employee is taxed on $80 of ordinary income. This is the standard treatment for compensation: a tax on one side is a deduction on the other. A payment of $80 cash to the employee yields the same treatment (tax deduction for the company, tax for the employee).

The *accounting* treatment under the old rules was definitely screwed up by failing to *ever* recognize expense. However the IRS didn't make the same mistake.

There is a different and more subtle tax issue that arises with backdating. Under the 1993 Clinton tax act, compensation in excess of $1 million is not deductible unless it is performance related. There is a possibility that backdating will lead to the option grant being deemed "not performance related" (since it has a baked-in gain due to backdating). In this case the company will lose the deduction when the option is exercised. The employee would still have to pay taxes. If an executive had exercised $100 million of backdated options, the company could lose the deduction on this amount. When news stories refer to tax issues related to backdating, I think this is mainly what they're talking about.