CA admits to backdating stock options

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Executives at Computer Associates set stock options aside for up to two years before issuing them to employees in a way that produced large windfall gains, the US software company disclosed on Monday.

News of the compensation practices came as the software company joined the growing band of US technology and other concerns to admit to “backdating” employee stock options.

The practice, which involves giving out options with exercise prices that were set at earlier, more favourable levels, has drawn the attention of the Securities and Exchange Commission and prompted a full-scale investigation by Federal prosecutors in San Francisco.

Computer Associates on Monday also slashed $342m from its reported pre-tax profits for the period 1996-2006 to reflect the fact that the implicit gains in the employee options should have been treated as an expense.

Other tech companies to have already reported big retroactive options charges in recent weeks include Mercury Interactive, which set aside $525m, and Broadcom, which took a charge of more than $750m.

The latest disclosure of accounting failure at Computer Associates follows a series of earlier irregularities, some of which led to the replacement of the company’s entire senior management team and the prosecution of Sanjay Kumar, former chief executive officer.

In April he pleaded guilty to a $2.2bn accounting fraud and is awaiting sentence. According to one former senior executive of the Long Island-based company, the continuing revelations of accounting shortfalls have resulted partly because of the company’s decision to subject all of its business practices to intense scrutiny since the disclosure of earlier failures.

CA said the latest charges related to options handed out before 2001. The company’s compensation committee had set aside pools of stock options, which managers had then handed to employees as much as two years later, it said.

Ironically, many of the stock options that have given rise to the large charges at Computer Associates and elsewhere, and which are at the centre of the civil and criminal investigations, never led to any actual profits for employees. The collapse in technology stocks rendered many options worthless before they could be exercised.

Although US companies were not forced to deduct all stock option expenses from profits until recently, earlier accounting rules still required them to charge the cost of “in–the-money” options, or ones that carried an exercise price below the market price on the day they were handed to employees.

A widespread failure to comply has led to investigations that have already reached more than 80 companies, though academic studies suggest that the number potentially involves is far larger.

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