Wednesday, April 25, 2007

Apple and Backdating

Ok, let's talk Apple and stock options backdating. Apple gave employees, including Steve Jobs, stock options. They picked a favorable past date for the options grant. None of this is illegal. It's not even necessarily improper if you are consistent.

So why all the hullabaloo? (that's a technical term) ACCOUNTING. Stock option are treated like future money. The stock is at a $1, when it hits $2, you get the option to buy the stock for a $1 and sell it. There's often a time component and I'm oversimplifying for illustration. The idea is that you will be motivated to improve company performance and that moves the stock. It's a future incentive for future events. The accounting point is that in this scenario, the company didn't have to expense the options. They got to give incentives today and not pay for it until later. 

IF however, the stock is at $1 and you get the option to buy at 50 cents, then the options are already "in the money". This is no longer motivation for future performance. It's now simply compensation.

Both are legal. Both have proper accounting treatments, but you don't get to have your cake and eat it too. There is every indication that many of the backdating scandals created "in the money" options that were not treated as compensation. If it's compensation, it's compensation and Steve and the rest of the team should have taken the compensation hit.

Why am I all worked up about this? Apple's ex-CFO, Fred Anderson, has settled with the SEC and has some recent quotes in the news. In fairness to  him, the news outlets probably have it wrong, but just in case:

From the San Francisco Chronicle:

"Fred cautioned Mr. Jobs that the executive team grant would have to be priced based on the date of the actual board agreement or there could be an accounting charge," Roth's statement said. Anderson "relied on" on Jobs' assurances and concluded that the grant was being handled properly, the statement said.

From the Associated Press:

Roth said Anderson was reassured by Jobs that the board of directors had granted the necessary approvals, and thus proceeded with the conclusion that the grant was being properly handled.

Fred, you were the flipping CFO of a publicly traded company. Board approvals don't allow you to abdicate your responsibilities to shareholders.  Nor does relying on the CEO's assurances let you skip accounting requirements. You own the financial statements, look at the entries to see if the options grant was done right. If you're not happy, keep pushing! It's better to be shown the door for forcing correct accounting treatments than for looking the other way. Standing up to strong CEO's isn't easy. If it was, the job wouldn't pay anything.

The charges against Nancy Heinen, Apple's former General Counsel, appear more serious. She is accused of active fraud, including making up board meetings, not simple indifference so I'll save my outrage toward her for a different post.

Update: The Wall Street Journal (as usual) has more specifics than other outlets. Dennis Howlett of the AccMan blog is more forceful with words like "spineless".

No comments: