A couple of non-tech firms made backdating news recently. First up: KB Home (NYSE:KBH), which announced on Friday that it had roughed out the extent of its option pricing issues. The size of the issues was relatively low: $50 million pretax, including a $15 million tax charge. What was surprising was how far back the mispricing occurred: things first went wayward in 1999. The company plans to restate only from 2002 through 2005, plus the two quarters already reported in 2006. It plans to correct the years before 2002 through opening balance adjustments.
Similarly, Home Depot (NYSE:HD) admitted in its 10-Q filing that it has improperly dated options from 1981 through 2000 - the longest backdating stretch known to this writer. Understated compensation: $200 million, at this count. While that’s not material to the company, it might well have been material to those who received some of it.
Home Depot’s disclosure illustrates some of the problems encountered by auditors and special investigators in trying to uncover the right truth when it comes to archaeological accounting:
“…Because of the absence of records prior to 1994, it is unclear whether allocations also postdated the selected grant dates from 1981 through 1993. Moreover, for many of these annual and quarterly grants from 1981 through December 2000, there is insufficient documentation to determine with certainty when the grants were actually authorized by a committee of the Board of Directors. Finally, the Company’s stock administration department also retroactively added employees to lists of approved grantees, or changed the number of options granted to specific employees, without authorization of the Board of Directors or a board committee, to correct administrative errors.”
Some commentators have suggested that the SEC should offer a cut-off of say, 1999, as the farthest back that an examination should go. I disagree. If a firm is known to have been dishonest with its shareholders, amnesty isn’t the right answer. It’s like saying if you got away with it before a certain date, it’s okay. It’s only fair to pursue these investigations until the facts have been found, and then stop - even if they go back a long time. When the trail’s cold, then there’s no choice but to stop.