Stock Option Grants Need Scrutiny

by Vineeta Anand, Aug 30, 2007

The AFL-CIO is urging auditors to play closer attention to stock option grants by corporations to prevent future abuses such as backdating or spring-loading.

In an Aug. 23 letter to the chief executives of the largest four accounting firms, PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche and KPMG International, AFL-CIO Secretary-Treasurer Richard Trumka recommended auditors exercise “professional skepticism” in their review of stock option grants.

His letter asked auditors to confirm the dates of stock option grants and question executives and directors about a company’s policies of granting stock options. Trumka’s letter also asked auditors to watch out for potential red flags, such as inordinately large stock option grants to top executives or grants made just before or after a big increase or decrease in the company’s stock price.

In the letter, Trumka wrote:

We are especially concerned because stock option abuses appear to have been endemic at U.S. corporations, touching some of the nation’s largest companies such as UnitedHealth Group, Apple and Home Depot.

Backdating involves looking back for low points of the company’s stock price and then pretending the options were granted on those favorable dates. Spring-loading is the practice of granting stock options just ahead of good news expected to lift the stock price or just after the announcement of bad news.

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