“If you filed a restatement that was obviously more apt to cause litigation,” said Donald Whalen, director of research at Audit Analytics.
And despite concerns that auditors should have caught some of the backdating, corporate audit firms were named as defendants in just 13 cases.
Overall, the evidence is consistent with the hypothesis that the loss of investors’ confidence in the firm’s management is a first-order determinant of the economic consequences resulting from the option backdating scandal.
That’s the number of legal cases stemming from alleged stock-option backdating.
We find that the losses are attenuated when tainted management of less successful firms is more likely to be replaced.
We also find that institutional investors reduce their holdings in firms accused of backdating, possibly due to higher monitoring costs, and that firms involved in the scandal are very likely (10% of the sample) to receive arguably fair takeover offers.
Improper backdating occurred when stock-option grants to executives were timed to match yearly or quarterly lows in their company’s share price, but were often reported to shareholders at a higher exercise price.
For example, an invoice might be backdated to falsify the date on which revenue was received or on which expenses were incurred in order to claim a tax benefit.
A document may be backdated for a variety of reasons, some of which are innocent and some of which are improper or fraudulent.
The former category includes the situation where the parties to a deal reach an oral agreement before a written contract is prepared, and the written contract is backdated to match the date on which the oral agreement was made.
If lawyers are involved in the practice, they may also face disciplinary penalties under their professional conduct rules, such as having their practising certificate revoked.
In 2014, a solicitor in the UK had her practising certificate revoked when she backdated a letter to the lawyers for the other side in litigation proceedings to make it appear that she had complied with a court order to submit medical evidence to the other side by a certain date.
Conversely, variables one would expect to be related to the magnitude of direct out-of-pocket expenses, namely the number of past grants and/or their value, are not significantly related or are positively related to shareholders’ wealth effects, inconsistent with the direct cost hypothesis.