Options are a major portion of an executives pay package. The backdating of option has happened too often the corporate world. Since the audit has dated proof of the time an option is granted, is there any other need for an auditor to pursue additional information?
Options backdating refers to the altering of the date a stock option was issued to an earlier – or sometimes later – date when the price of the stock was lower. It makes the stock be more valuable. Despite the fact that options are not illegal, they may be unethical as they may involve cheating the corporation to grant top level executives more money that what is required. Stock options pose a significant challenge to auditors. Options necessitate auditors to request for additional information. This is due to the fact that some companies may not account for the stock options properly, which would make them provide financial statements. Auditors should also be on the lookout since there may be inconsistencies with how the backdated stock options were first reported and disclosed (Jennings, 2011).
Backdating of stock options also necessitates companies to restate their financial statements. Generally, backdated stock options require companies to recognize the additional expenses in their financial statements. In some instances, this has made the companies engage in illegal accounting practice to hide the real value of the stock from interested parties. Therefore, it is vital for auditors to assess the back-dating related risks in the financial and internal control reports of the company in question. Failure of companies to properly account for backdated stock options would result in errors on the compensation costs. The errors would subsequently lead to material misstatements of the financial statements of the company (Jennings, 2011).
Auditors should also assess the option-plan provisions that enable companies to choose option prices that are lower than the grant date. This is due to the fact that executives may improperly report backdating when they prepare the documentation of the option. This would enable them treat a certain date as a grant date when the conditions to issue a grant have not yet occurred (Jennings, 2011).