Accounting Observer > Public Blog - A Long Look Back At Options Dating

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A Long Look Back At Options Dating

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	10/24/2006 7:12 AM
If a movie is ever made about the options backdating scandal (not likely), it might open with a crawling text message on the screen that reads like this: "A long time ago in a bubble far, far away..." The options investigations are stretching way, way back in time - and they'll produce some restatements that go way, way back too, if the differences between right and wrong accounting are material enough in prior years. Yesterday, Integrated Silicon Solution, Inc. filed a non-reliance 8-K warning investors that its special committee investigating options grants had found that "... the actual measurement dates for financial accounting purposes of certain stock options granted primarily during fiscal years 1997-2005 differ from the recorded grant dates of such awards. Consequently, new measurement dates for financial accounting purposes will apply to the affected awards, which will result in additional and material non-cash stock-based compensation expense... ISSI's Board of Directors, with the concurrence of the independent committee, determined that ISSI should restate its financial statements for various periods since ISSI's initial public offering in February 1995." No specifics were mentioned on the years to be restated, but the tone of the statement makes it sound like 1997 through 2005 could be fair game. Though the company came public in 1995, even 1997 is a long way back for restatement. Different firm, different industry, same message: another recent non-reliance filer is Valeant Pharmaceuticals International. In its 8-K it disclosed quite the same issue: its special committee had determined that options granted between 1997 and "subsequent years" had incorrect measurement dates and correcting them will cause financial statements to be restated for certain, yet-to-be-determined periods. As these investigations get worked out, there will likely be many auditor-client controversies over what constitutes a big enough difference in past history to require restatement. Firms would prefer to see as few restated back periods as possible, and play catch-up with their corrections whenever they can justify it: the less information given about the past, the fewer questions that can be asked by investors. (And trial lawyers.) At the other end of the information spectrum, investors should prefer more details about the past. After all, the accounting that was violated (APB 25) was the accounting of choice by these firms and it should have presented a picture of the compensation cost to shareholders. (It was an incomplete picture: SFAS 123 accounting would have been better.) APB 25 was, however, what companies had agreed to abide by, and it should have showed compensation. As it turned out, companies didn't abide by it, and compensation went unnoticed. Investors should care.

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