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Broadcom to Take $750M Backdating Charge

This latest restatement comes amid new findings that 2,000 companies have backdated options to sweeten executive pay packages.
Stephen Taub, CFO.com | US
July 17, 2006

Broadcom officials said the company will restate financial results for more than six years, and take a $750 million charge to correct improperly recorded stock options. The chip-making giant said the revisions will cover financial results for years ended 2000 through 2005, as well as for the first quarter of 2006.

The announcement came amid the release of a new study that claims that 2,000 companies have used backdated stock options to sweeten their top executives' pay packages. The study, cited by the New York Times, was authored by Erik Lie, a finance professor at the Tippie College of Business at the University of Iowa, and Randall Heron, of the Kelley School of Business at Indiana University. The authors estimated that 29.2 percent of companies that use stock options have backdated the awards, and 13.6 percent of options granted to top executives from 1996 to 2005 were backdated or otherwise manipulated. "It is pretty scary, and it's quite surprising to see," Lie told the Times.

Regarding Broadcom's restatement, preliminary findings by the company's audit committee concluded that for certain option grants awarded from 2000 through 2002, the allocations to individual recipients, and formal corporate approvals, had not been completed as of the original accounting measurement dates. As a result, substantially all of the estimated $750 million in expense will be recorded in the years 2000 through 2003.

Company officials also stressed that no issues have been identified that affect equity awards issued to Broadcom's co-founders, chief executive officers, or board members. In addition, no unauthorized equity awards have been identified by the audit committee, nor did they find that officers and directors approved equity awards from which they personnally benefited.

Broadcom officials emphasized that the additional non-cash, stock-based compensation expense will not affect its current cash position or financial condition, or previously reported revenues. Furthermore, the company explained that the expense will be offset by corresponding increases in additional paid-in capital, thus leaving shareholders' equity unaffected. "We are making good progress in our equity award review and toward the eventual resolution of this issue," said Scott McGregor, Broadcom's president and CEO, in a statement.

This is the second time Broadcom's accounting practices have been questioned since the manufacturer became a public company in 1998. In 2001, the company was criticized for how it accounted for performance-based stock warrants issued to customers of acquired companies in the face of canceled customer contracts.




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