I had a discussion with Erik Lie about the experiences with Stock Options Backdating (SOBD) and the economic impact of his work. According to Erik, at least 15% of the stock options grants between 1996 to August, 2002,were backdated. Some were within 30 days of the grant date, others more egregious. The number of companies though he said that were going to come clean would be far less than 15%. Here is what we came up with.

First the assumptions:

1. # of companies that actually are investigated or asked by the SEC (currenty June 03 is 42) by June 2006 = 100

2. # of companies that will complete the 3 step process of preliminary investigation, comprehensive audit and finally restatement of results (approximately at 30-50%) = 40

3. Approximate amount of time spent performing the initial investigation = 4-6 weeks.

4. Approximate time spent doing comprehensive audit = 20-32 weeks

5. Costs in back taxes, delisting, restatement, defending lawsuits & fines = 30% of cumulative value of option grants

6. Size of company assumed on average: $500M in revenues, 2500 employees, 25+ grants under inquiry

7. Grant value net = $15M per incident

If you want to do your own analysis (how much will this cost my company), feel free to use some of these estimations.

# Expense Item Description Cost

1 Initial Investigation Typically done by Board & Audit team $1.5 M   2 Communication expenses Economic impact of communication loss to company $4M   3 Audit fees Formal investigation fees for auditors $30M   4 Restatement costs Includes delisting, cost of documentation,  $9 M   5 Taxes and fines Back taxes owed to IRS, Fines by SEC $15 M   6 Legal fees Defending lawsuits on backdating $20M  Subtotal For each company, $500M revenue $79.5M  Assuming 50 companies  Completely go over the end to end process $3.975B
Assuming remaining companies Remaining companies only go over steps 1 & 3 $1.75 B

For each company approximately = $50 to $100 Million in expenses.

http://blog.vangal.com

Mukund Mohan

Mukund Mohan is an expert in stock option backdting and head of Vangal. He was head of product marketing for Mercury responsible for the direction and customer success of the company’s Application Management solutions. Mukund is a frequently requested speaker at conferences and events including Gartner IT Expo, ITSMF, Mercury World and Interop. Prior to Mercury, he was Vice President of Operations at Conslient, a software company focused on process automation. In this role, he managed a team of sales and services personnel and was responsible for customer success. In addition, he held product and management positions at Ariba and Asera and began his career at Cisco Systems.

Mukund seves on the board of advisors of iConclude and Auptyma.

Mukund studied at the University of Maryland, Baltimore County pursuing a master’s degree in computer science and holds a bachelor’s degree in engineering and computer science from the University of Mysore in India.