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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

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Posted by: Jack Ciesielski	5/25/2006 6:03 AM
From the folks that brought you the options backdating panic, a couple of really good articles... Yesterday's "Long & Short" by Jesse Eisinger is a dead-solid perfect summary of how "in two short decades, stock options have gone from being the solution to the problem." He didn't go into details citing one professor or another with a really slick way to sniff out the next backdating bottom drop-out. He did, however, nail the reason why this issue resonates so loudly - and will continue to do so with regulators and prosecutors: "...as the stock prices of the companies involved in the backdating-scandal tumble, investors are realizing that widespread abuse of options grants were more than about earnings. They told you about character." Anyone whose been overly sanguine about options issuance (doesn't matter, it's a bean-counter issue; it's in the denominator; everyone else is doing it; management is worth what they're paid even if I don't know what the worth is, etc.) for the last ten years completely missed the point. When there's minimal visibility into what people do with their compensation - with the resources entrusted to them by shareholders - you're going to find out the nature of their character. And that's exactly what's happening now. He also rightly pointed out that the post-Sarbox required reporting for officer stock transactions might help reduce opportunities for backdating. Even if the quicker reporting deadlines weren't in place, only a flint-hearted scoundrel would think about backdating these days. (Or only if they were just plain dumb.) Different article in today's Journal by Gregory Zuckerman highlights the whirlwind witch hunt going on over backdated options. Everybody and their brother is coming up with their own hit list of who might be next on the receiving end of a subpoena. It reminds me a LOT of the Enron death thrash, when people kept calling here asking if I had a list of companies who were "using SPE's" - as if it were some kind of off-the-shelf deodorant. A worthwhile point made by Zuckerman: with everyone out there pushing some kind of list of potential villains, there's no sure way to separate the good guys from the bad guys. You won't know who they really are until the informal inquiry/special committee/US attorney general subpoena has been announced. I've made no list myself; I've outlined what concerned investors can do for themselves in a couple of these posts. (Screen on "Options Daze" in the search box.) But remember, folks: it's all circumstantial evidence. Keep that in mind before you churn an entire portfolio. Unfortunately, this is pretty reactive thinking. As Eisinger points out, all these things have to do with character - and all the evidence has been out there for years. And there's a certain fellow in Omaha who's been saying the same thing over the whole stretch.

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