This issue is one of intense public interest because it strikes at the heart of the relationship among a public company's management, its directors, and its shareholders. Securities and Exchange Commission Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee: Thank you for inviting me to testify today about options backdating.The leaked Mossack Fonseca files show the law firm regularly offered to backdate documents for clients, according to a report by the International Consortium of Investigative Journalists, a not-for-profit that coordinated the expose.
The SEC has been after the problem of abusive options backdating for several years.The backdating problem was first highlighted by Professor Erik Lie of the University of Iowa, who published his initial study in 2004.Professor Lie concluded that the robust profitability of so many options was statistically impossible absent some artificial influence such as backdating.(For more insight, see ) Although it may appear shady, public companies can typically issue and price stock option grants as they see fit, but this will all depend on the terms and conditions of their stock option granting program.However, when granting options, the details of the grant must be disclosed, meaning that a company must clearly inform the investment community of the date that the option was granted and the exercise price. In addition, the company must also properly account for the expense of the options grant in their financials.