MB657 Fraud Investigation. Business & Marketing Research Paper

Fraud Investigation
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Institutional Affiliation
Abstract
Stock option refers to a contract that authorizes holders of shares to sell their shares at any preferred time. There are no legal implications if a shareholder sells his shares to another, following the agreed terms in the signed agreement. For effective consequences, most companies tend to decide on the most appropriate time to implement a stock option in a company. The concept of stock option comprises the idea of backdating, called the stock option backdating. Notably, stock option backdating is a legal concept subject to the set rules. If a company fails to declare its practice of stock option backdating to shareholders, the company, therefore, becomes liable for the charges. The essence of backdating originated in the 1990s, when Micrel Company offered a stock option to its newly recruited employees. Following that, several companies adopted the strategy, though others withdrew shortly. Some companies like Apple, KB Home, and Monster Worldwide were penalized for deliberate and illegal backdating. To combat illicit stock option backdating, it is recommendable to formulate a regulatory body to oversee businesses' operations and promote internal company controls.
Fraud Investigation
Stock Option
A stock option is an agreement that conveys rights to shareholders, though not legal duty to purchase or sell shares of a specific security at a particular price, or prior to a specified date. It is worth noting that it is the seller of the option that solely grants this right. According to Thomas (n. d), there are two notable types of options, and these are calls and puts options. The call option permits the possessor a right to purchase underlying security. Meanwhile, the put options transfer the right to sell an underlying security. In this case, underlying security refers to a specific stock upon which a given contractual agreement is based. In most cases, companies, regardless of the mode of ownership, either privately or publicly owned, practice stock options for various reasons. These may include; a desire to attract and retain good workers, recognize and appreciate their employees, and the need to hire skilled workers by offering them the compensation that a free from salaries.
At times, companies tend to decide on the appropriate time to exercise their stock options, and these are the financial situation and price of the company’s stocks (Dale, 2020). Handling them respectively, companies practice stock options when its costs are lower, compared to the market share price. Positively, this cannot affect a company's operation because its cost of exercising is relatively low. Besides, companies embrace stock options at the time of the company's low stock costs. Conversely, in the company's stock price drops lower than the exercise price of options, there is a possibility of losing more money if a company exercises stock options. Therefore, companies need to be vigilant while exercising stock options to avoid irrelevant losses of money and company collapse.
Stock Option Backdating
There is one other common element of stock option, and this is stock option backdating. In simplicity, a stock option backdating is the refers to the practice of changing the date of which a stock option was granted, mainly indicating that time at which the underlying stock price dropped below the current price. In a nutshell, backdating is the repricing option that elevates the values of products. The concept of backdating the employees’ stock options has attracted both public and media focuses. Fortunately, the backdating a stock option is a legal concept. However, a business is required to disclose that they are embracing stock options, and the investors need to be conscious of all the financial information of a company. Alternatively, it is burdensome on the business if the company fails to unveil stock options to shareholders and regulators (Schmeister, 2017). The main reason behind this is that options are merely a way of compensating employees. If a company fails to disclose this concept to investors appropriately, it gives a negative picture to investors.
For companies to escape the liability arising from backdating stock options, they need to be cautious with the proper protection of statements. These are achievable through; keeping accurate records, maintaining adequate accounting controls within the company, and providing accountants with relevant data to formulate excellent financial statements. Backdating, though, is permissible, needs to be transparent. Improper backdating calls for legal actions against that particular company. Sincerely, this can be proved through the statement of earnings, where fraud can be easily be detected. In most cases, public companies that are guilty of improper backdating violate the federal securities disclosure and reporting requirements. Eventually, they may immediately face criminal or regulatory investigations as well as security fraud litigation.
History of Backdating
The notion of backdating originated in the 1990s, at a time when Micrel Incorporated Company, a technology company issued newly hired workers with stock option. In this case, the company used the “preceding 30-day low price” as employees’ reward mechanism. Following that, other corporations adopted the practice of backdating, just like the Micrel Incorporated Company. According to Cascini & DelFavero (2010), many companies withdrew from the practice, asserting that it is unethical conduct in business. Moreover, they pulled out even before there were no legal regulations regarding this practice by then. The authors still add that this is a legal practice, as long as the company meets some standards while implementing it. Primarily, the company is obligated to disclose this practice to shareholders, and if not done so, the company is always penalized, as shown in some of the selected companies below.
Examples of Companies Found Guilty of Illicit Backdating
Apple Company
The verdict in the claim against this company emerged in 1997. In this case, the company CEO, Jobs, had issued four top executives options to purchase shares totaling to nearly one million shares. Subsequently, the values of these shares staggered, prompting the institution of a lawsuit against a company in 2006. It was argued that the company backdated other grants to the period at which the stock was of lower prices. Due to that, Fredrick Anderson, the former CEO, accused of intentional delivery of erroneous financial statements, was forced to a fine of 3.5 million dollars in ...