The Public Company Accounting Oversight Board issued its first-ever audit practice alert, warning auditors to be on the watch for problems in the timing and accounting of stock-option grants."Auditors planning or performing an audit should be alert to the risk that the issuer may not have properly accounted for stock option grants and ... may have materially misstated its financial statements," the alert said, alluding to recent investigations by both the Securities and Exchange Commission and the Internal Revenue Service into whether companies routinely backdate, spring load, or otherwise manipulate, stock options grants to top executives.

The alert notes that while the implementation of Sarbanes-Oxley and a new rule from the SEC -- requiring companies to report the issuance of a stock option grant with two days -- appears to have curtailed the abuse of option grants, there's still no guarantees.

The PCAOB specifically addressed options backdating, defining the practice as the "selection of exercise prices based on market prices on dates earlier than the grant date" and "modification of option documentation for purposes of indicating a lower exercise price than the market price at the actual grant date." The board also described spring-loading s options "purposefully granted ... immediately before the release of information that the issuer believed would be favorable to its share price."

While spring-loading does not necessarily result in accounting errors, the practice "may create legal or reputational risks and raise concerns about the issuer's control environment," the alert warned. Auditors were also reminded that even small misstatements could be seen as significant when related to unlawful acts.

Prosecutors and the SEC filed civil and criminal fraud charges against the former chief executive of Brocade Communications Systems Inc. last week, the first brought in an on-going investigation of option grants.

The alert, titled "Matters Relating to Timing and Accounting for Options Grants," is available at www.pcaobus.org/News_and_Events/News/2006/07-28_Release.pdf.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access