One issue that has been plaguing corporate America is the handling of employee stock options, well at least how they are accounted for in black and white. Under the accounting guidelines established by the Financial Accounting Standards Board, or otherwise referred to as FASB, it states that “…compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock…”, (I am not going to bore you with Stock Options 101 here, so if you’re interested on more, click here). Interestingly enough, Apple Computer Inc., with share prices soaring well over 100% over the past year, has earlier today been added to the list of other companies to confess that they had some problems with their reporting of employee stock options. Now, analysts are asking just how reliable their past financial statements were in disclosing such this rather material expense.
In the public announcement, Apple says that they are now conducting an investigation to determine if any irregularities may have incurred between 1997 and 2001. KPMG their auditors will most likely deny the blame, despite their negligence to catch such material expenses over the five year period. Apple said that it will higher external legal support to investigate this issue, and if necessary (which most likely will be), contact the Securities and Exchange Commission on the problem. The SEC has subsequently launched its own inquiry after other companies have raised a red flag about their past stock options. The U.S. Justice Department also has subpoenaed information from many companies suspected of rigging its stock options to lock in bigger windfalls for top executives and other employees.
To benchmark the materiality of stock option expenses, and how it would impact the bottom line of their financials if they were to take a one-time charge, look at the stock options that were awarded to Apple’s co-founder Steve Jobs, up to five million shares now worth approximately US$295M (the chief executive canceled these awards in March 2003 before he cashed them in to realize a gain).
Amongst all the positive economic news that has sent stock markets soaring worldwide, from the Federal Reserves interest rate hike, to better than expected employment news in the US, this stock option scare, released after the market closed, appeared to dim the optimistic market. Apple’s shares had jumped on the bandwagon, up $2.95, or 5.3% during trading hours, and closed at $58.97. After hours traded pushed the stock price downwards by $1.42 on the reaction of the negative news.