Tuesday, December 21, 2021

Back dating

Back dating

Other elemen elements ts of suspicio suspicion However, where lay persons write contracts themselves or download a pro forma from the internet, often these legal niceties are lost upon them. You can learn more about the standards back dating follow in producing accurate, unbiased content in our editorial policy, back dating. Resources Blog Free Courses Investment Banking Resources Financial Modeling Guides Excel Resources Accounting Resources Financial Statement Analysis. Life Insurance.

Insuranceopedia Explains Backdating

Many features of this site require JavaScript. Learn how to enable javascript. Although backdating can be either legitimate or improper, it is often misunderstood and associated with wrongdoing. Backdating encompasses a broad scope of conduct ranging from blatant fraud to the legitimate and common practice of executing a document after the event has already occurred.

This article provides a brief overview of how to distinguish legitimate backdating from improper back dating. To a layperson, backdating sounds like a bad thing. But it can be either right or wrong. Its legitimacy depends upon its back dating and effect. In some cases, backdating is pure fabrication. It is improper, of course, to date a document on one date, but the event occurred on a different, later date, back dating.

Typically this type of backdating occurs when the beneficiary of the backdating can reap some sort of tax or other benefit if the event had occurred on the earlier date. However, not all backdating back dating fabrication. Backdating can also back dating the practice of dating a document on the date the event occurred even if it is not signed until later.

Here, the event occurs before the document evidencing it can be executed, and the document simply memorializes the earlier event. This is both a common and legitimate use of backdating. Simply put, if a document is dated before the occurrence of an event, the backdating is fabricated and improper. On the other hand, if the document is executed after the event has occurred but accurately reflects the date of the event, the backdating is a proper memorialization, back dating.

The line between these practices, however, is not always clear. For example, the date when the event itself occurs can be uncertain. Sometimes the law governing the event is ambiguous, and other times the facts surrounding the event are unclear.

Often a contract arises through a series of negotiations, back dating, and the exact time at which the agreement is reached may not be clear. Thus, when a contract is drafted that backdates to the date when the parties believe their agreement was reached, it may be unclear whether the backdating fabricates or memorializes. Likewise, backdating is a common practice in the conveyance of property, and back dating too the time of the transfer of ownership can be unclear.

Determining the date of an event is further complicated by ambiguous records, limited recollections and the reliance on the recollections or statements of others. Unfortunately, back dating, backdating is often inevitable, back dating.

It is also important to have an attorney review the issue and provide guidance before you choose to backdate anything. View All Blog Posts. Is Backdating Ever Okay? December 5, Marc Ward Although backdating can be either legitimate or improper, it is often misunderstood and associated with wrongdoing. Examples of improper, back dating, fraudulent backdating: The backdating of a transaction from January of one year to December of the previous year in order to receive tax benefits from the earlier date.

The backdating of a back dating to protect real estate from a creditor. Examples of legitimate memorialization: A lender loans a borrower some amount of money, which the parties agree will be memorialized with a promissory note.

Thereafter, the promissory note is drafted and dated as of the date the loan was made, back dating, not the date that the note was drafted. During a board meeting, back dating, the directors verbally approve certain corporate actions.

Later, the meeting minutes are drafted and executed reflecting the date of the meeting, not the date of the execution of the document. stores cookies on your device to enhance site navigation, make your browsing experience as useful as possible, and analyze site usage.

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Selected Plan: Share price evolution around stock option grant 80 60 40 20 0 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 Note: basis at D before grant 18 Figure 5. Selected Plan: Cumulative Abnormal Return around Grant Date We could suppose that backdated plans are more likely to concern a relatively small number of people the smaller, the easier it is to backdate and the easier it is to keep the process confidential.

Top executives who have the power to grant stock options and who therefore could have an incentive to backdate stock option awards, are also very likely to be beneficiaries. In the case of this plan, there were 16 beneficiaries.

Unfortunately we have no information on whether the 16 people belong to top management and the fact that the number of options granted 30, is fairly small relative to previous and following plans makes it an unlikely candidate for a top-executive only plan. To conclude, there is relatively strong evidence that the conclusions of the Lie study on the timing of stock option awards are not applicable to the French market, at 19 least for the CAC 40 index.

We will first discuss our methodology the quality of our sample and our abnormal return model which slightly differs from the one Lie used. Then we will try to find elements of the French regulation and customs on stock option grants that could have prevented companies to backdate stock option awards. A critical review of our methodology 3. Our Sample: Two features of our sample may be criticized. First, the relatively small size of our sample could limit the conclusions one can draw from it.

Our sample consists of plans granted by 35 companies from to , of which are classified as scheduled and as unscheduled. This seems relatively small compared to the sample used by Lie in his study, which studied 5, stock option awards from through , 1, of which are classified as unscheduled and 1, as scheduled.

But we do not think it is a major obstacle as if backdating existed massively it should have appeared in our sample. The main feature we see as a possible shortcoming is the big cap bias of our sample. The 35 companies we studied were all constituents of the CAC40, the French blue chip index, as at December 31, Therefore the average size of the company of our sample is likely to be greater than the average size of the company in the sample used by Lie.

Why does this matter? We see at least two reasons. First, the bigger a listed company the more it comes under the scrutiny of the French market regulator and of its auditors.

As individual investors are more likely to invest in these large companies and as it is one of the mandates of the AMF to protect individual minority shareholders, CAC40 companies are likely to be more monitored by the AMF.

This means that the risk of being caught increases which can deter managers from the temptation of backdating.

There is also greater scrutiny from auditors. One reason could be that they fear to be associated with a stock option 21 related scandal that would mean legal risks and negative press coverage for them. These two factors, combined with the corporate scandals of the past years, have contributed to stricter corporate governance rules for large-cap companies.

The second explanation to the unlikelihood of backdating in large companies is more organizational. We tend to think that the power and responsibilities are less centralized in the hands of a few top managers than in smaller businesses. Our talks with the legal departments of listed companies confirmed our intuition : given the number of people involved in a board of directors decision, an attempt to backdate is likely to be reported through whistle blowing procedures.

Therefore, CAC40 companies make relatively poor candidates for backdating. However, they were the ones for which we could collect the most information and that is why we chose to study them. Further studies may be carried out on smaller companies where corporate governance standards may be not as high and where regulatory and media pressure would be weaker.

Our Abnormal Return Model The model we chose has an undeniable advantage, the one of simplicity. We calculate abnormal returns as the excess return of the stock compared to the return of the market. The underlying assumption is that every company has a beta equal to one and that the CAPM model holds. This is a very simplifying assumption, as beta can vary a lot from a company to another and as the beta of a given company can vary overtime.

What are the consequences of this assumption? The main one is that the value of abnormal returns are overestimated or underestimated compared to a traditional CAPM model. Let us take an example. If on a given day the stock and the market vary in the same direction, it the beta of the stock is superior to one, the absolute value of the abnormal return will be overestimated. However this is compensated in cases where the stock price and the market do not move in the same direction.

Therefore, we cannot say if this assumption could really impact the overall meaning of our results, compared with a more traditional CAPM model. The model used by Lie is far more refined that ours. This may have an impact on our results and 22 redoing our analysis with a more elaborated model like the one used by Lie, the three factor model of Fama and French , could be eventually the object of a next study. The method of determination of the exercise price of a stock option plan We believe that the method of determination of the exercise price for a stock option plan partly explains the absence of backdating for the studied companies.

The day average rule simply means that there is a greater lag in the effectiveness of backdating. In the American case, it is easy to imagine a board of directors delaying the decision because on a particular day there will have been a sharp increase in the stock price. One could argue that because in France there is a 23 larger lapse of time between the granting and the disclosure of the granting of a plan, backdating would still be possible : within two or three months of a chosen grant date, a company could look at the past day average and choose the lowest point as date of the grant.

This is possible ; however, in the first place, the longer the lapse of time between grant date and decision of grant the backdating period , the larger the risks in terms of discovery of the backdating. Secondly, the day average virtually eliminates local backdating , which could be defined as a backdating period of one to five dealing days.

It could be argued that the use of such a rule in the United States, in conjunction with the disclosure rule could hinder even more the use of backdating. In effect the 2-day disclosure rule is a heavy process for t he regulator and the company reporting, and the fact that some companies file their disclosures late proves that it is sometimes not well respected. Corporate practices: a stock option plan is never granted to a CEO alone In conducting our survey of the stock option plans granted by the CAC 40 companies, we realized that there are only seven instances out of the stock option grants studied where the only beneficiary or beneficiaries are the executives of the company.

And the study of the patterns of cumulative abnormal returns around the grant dates of the stock option plans does not show any trace of backdating : Figure 5. Grant for which executives are the only beneficiairies Cumulative abnormal return 5.

We suppose that this can be attributed to the French corporate cultural mentality around high compensations of chief executives, which are considered as 25 outrageous ; handing out the same kinds of compensations to others though not the same quantity would be seen as a fairer practice.

We believe these views on executive compensation remain strongly embedded in France and should not be underestimated. Furthermore, we could argue that it is hardly imaginable that executives backdating would want to take the risk for others. However, we uncovered an interesting and significant pattern in the cumulative abnormal returns of unscheduled stock option plans that shows that these plans are opportunistically timed before an increase in the share price of the company.

We believe that the study of the granting of stock options in France could be pursued by further studies. First of all, it would be precious to widen the sample to include mid- and small-cap companies listed in France. This would provide a larger sample as well as a test sample to see if the cumulative abnormal returns patterns differ or not from that of this study. Furthermore, the cumulative abnormal returns model could be improved, either by including the beta or the three-factor Fama and French model.

A third area of improvement would be in the interpretation of the positive cumulative abnormal returns following the grant of stock options : a study based on the voluntary disclosures policy of the companies before and after the grant date might yield interesting results.

On the timing of CEO stock option awards. CEO stock option awards and the timing of corporate voluntary disclosures. Accounting Econom. Good timing: CEO stock option awards and company news announcements. Skip to primary navigation Skip to main content Skip to primary sidebar Skip to footer About Contact Login.

Home » Accounting Resources » Bookkeeping Resources » Backdating. Article by Abhilash Ramachandran. Reviewed by Dheeraj Vaidya, CFA, FRM. What is Backdating? Explanation Usually, backdating is considered an offense and is bound by legal consequences; however, it may be acceptable if both parties in the contract are on the same page. Why Backdate Document? Footer Company About Reviews Contact Privacy Policy Terms of Service.

Resources Blog Free Courses Investment Banking Resources Financial Modeling Guides Excel Resources Accounting Resources Financial Statement Analysis. Courses Courses Financial Analyst All in One Course Investment Banking Course Financial Modeling Course Private Equity Course Venture Capital Course Excel All in One Course. Please select the batch. The first and most important thing to note about the consequences of backdating a document is that it is potentially a criminal offence.

However, at common law this was a criminal offence going by the contradictory sounding name of uttering a false document and in most English law based legal systems it is still an offence today, although in many cases statutory provisions have superseded the common law for example, in the British Virgin Islands see section of the Criminal Code Where backdating is done for financial gain, it may also constitute the more dull-sounding criminal offence of obtaining a pecuniary advantage by deception.

Although criminal prosecution might be a risk in serious fraud cases, in most day to day legal matters where backdating occurs for reasons of administrative convenience, or simply by oversight or error, the risk of being charged with a crime are commensurately small. But even if a person is not charged with a crime, the fact that a crime can be demonstrated to have occurred may still impact the rights of the parties. In certain cases a criminal act may negate insurance.

Lack of a prosecution does not mean a lack of legal consequences. However, such doctrines are normally limited to situations where one party backdates the contract without the knowledge or consent of the other.

Where both parties consent to the backdating of the document, normally the courts in common law countries will simply disregard the backdating of the document, and treat the rights as accruing from the date when the document was actually executed.

Although in exceptional cases — where third party rights are not affected — the courts might be persuaded to treat the stated date as being the effective date, a situation we return to below.

So is it ever OK to backdate a document?

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