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August 30, 2006

Barnes & Noble Stock Options


Barnes & Noble, the largest bookseller in the US, became the latest company to be embroiled in the stock options scandal, admitting it had received a subpoena from the Department of Justice.

The group is one of around 80 companies under suspicion of artificially inflating the value of stock options to executives by backdating them to a time when the share price was lower, potentially boosting their value. Most are in technology companies based in Silicon Valley.

The practice can distort a company's accounts and has forced several to restate results, knocking millions of dollars from reported profits.

No, not whatever it is that B&N has allegedly done, rather the reporting. You see there’s nothing illegal about backdating options, nothing at all. The illegality comes in how you account for it. If the backdating results in those options being in the money (ie, they are backdated to when the share price is lower than the day of granting) then that amount that they are in the money must be:

1) Declared by the executive as income and tax paid upon it.

2) Declared by the company as executive compensation and the sum deducted from reported profits (just like any other business expense).

What is alleged is that the 80 companies (and counting) did not follow steps 1) and 2). Backdating them is no problem, no problem at all. How you report what you’ve done is the problem.

August 30, 2006 in Scams and Frauds | Permalink


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Without omitting steps 1 and 2, would there be much point in backdating them?

Posted by: dearieme | Aug 30, 2006 11:49:27 AM