The backdating scandals
Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within a two-month period.
However, if the options were effectively in-the-money on the decision date, they might not qualify for such tax deductions.This adjustment to the filing window came with the Sarbanes-Oxley legislation.After the two-day reporting rule went into effect, the SEC found numerous companies were still backdating options in violation of the legislation.Most shareholder approved option plans prohibit in-the-money option grants (and thus, backdating to create in-the-money grants) by requiring that option exercise prices must be no less than the fair market value of the stock on the date when the grant decision is made. For example, because backdating is used to choose a grant date with a lower price than on the actual decision date, the options are effectively in-the-money on the decision date, and the reported earnings should be reduced for the fiscal year of the grant.(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.