PracticeAuditReport backs auditors in US stock scandal

Report backs auditors in US stock scandal

Research by academics indicates auditors are not to blame for failing to protect investors caught up in the stock option grants controversy in the US

Independent research released this month by two US universities has gone some
way to clearing auditors of failing to protect investors caught up in the stock
option grants controversy in the US.

The report, titled Does backdating explain the stock price pattern around
executive stock option grants?, was carried out by two professors at the US
Universities of Indiana and Iowa, who examined 39,888 stock option grants to top
executives at 7,774 companies dated from 1 January, 1996 to 1 December, 2005.

The study concluded that before Aug. 29, 2002, some 23% of the
easier-to-manipulate unscheduled grants – as distinguished from grants that
companies routinely schedule annually – were backdated.

One of the report’s authors, the University of Iowa’s Erik Lie, said although
that there was no evidence that particular accounting firms were more party to
the scandal than others.

‘It has been suggested that some accounting firms have been pushing this
practice more than others,’ he said. ‘There’s actually very little evidence of
that, which to me is very comforting.’

With the first charges now filed in the stock options scandal in the US, this
is good news for auditors and investors.

So far, 60 companies – including Home Depot, Apple Computer and Juniper
Networks – have made it known that they are under investigation by either the
Securities and Exchange Commission or other government entities.

However, an analysis of the Thomson Financial Insider Filing database of
insider transactions revealed that as many as 2,270 companies may have backdated
stock options to ensure bigger pay packets for their executives – a much larger
number than was initially estimated.

Logically, the stock price at half the companies should have gone down and
half gone up after the grants, but the professors found that generally more
prices moved up than down.

No doubt worrying to the companies who manipulated the grants will be the
charges filed against the former CEO of Brocade Communications. There is no
allegation that Gregory L. Reyes backdated the options to enrich himself, but
rather that he falsified the paperwork to recruit and retain staff.

That broad brush, it is reckoned, will surely sweep up hundreds of
executives.

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