Human Capital & Careers

The Mounting Costs of Backdating Options

The aggregate amount of charges taken by companies involved in backdating options reaches $5.2 billion, as Trident and F5 Networks are the latest t...
Stephen TaubOctober 26, 2006

Trident Microsystems and F5 Networks are two of the latest companies to announce plans to restate prior results based on the way they accounted for stock options.

Trident, which provides digital TV technology, said it will need to revise its financial statements for certain periods to recognize material non-cash, stock-based compensation expense. The company said a special committee investigation concluded that incorrect measurement dates for certain stock option grants were used for financial accounting purposes.

Officials at Trident stressed that the investigation has not been concluded, so they are unable to determine the final amount of the charges or the resulting tax and accounting impact of these actions, or the impact on internal control over financial reporting. The company also has not determined which periods would be affected, saying only the revisions “may affect financial statements from the date of its initial public offering to the present.” The company went public in late 1992.

Meanwhile, network traffic management service provider F5 Networks said it will restate its financials for fiscal years 1999 through 2005 and to amend its financial statements for the first half of fiscal 2006 to correct the recorded date for previously granted stock options.

Based on its analysis to date, the company said it anticipates that it may be required to record additional non-cash, stock-based compensation expense of up to $30 million for fiscal years 1999 through 2006. F5 officials assured investors that although the company has not completed its analysis of the total net effect of the adjustments, the corrections are not expected to affect the company’s current cash position or previously reported revenues.

As more companies revise earlier financial statements to take accounting charges, the costs of the option scandal are clearly mounting. The San Francisco Chronicle reported that 60 companies have already taken $5.2 billion in charges to correct backdating, citing research from Glass Lewis & Co. “The $5.2 billion figure is going to get a lot higher,” Todd Fernandez, a senior research analyst at Glass Lewis, told the paper.

In addition to the 60 companies, another 24 companies have said they will have to restate their earnings, which implies they will also take a charge, continued Fernandez. Glass Lewis also reported that the 152 companies caught up in the backdating scandal saw their collective market capitalizations drop by $5.1 billion the day after each company announced its exposure to the problems, according to the Chronicle.

Furthermore, the companies that have been plagued by backdating scandals have frozen their employees’ ability to acquire company shares through stock purchase, stock option, or 401(k) plans, according to a separate Chronicle story. Such moves are creating angst among many employees, especially those who can’t exercise options that are expiring, according to the paper.

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