The head of the Internal Revenue Service said Friday that his agency will examine stock option awards to executives at some companies for possible tax-law violations, as the controversy over suspect timing of option grants spreads through corporate America.
IRS Commissioner Mark Everson said he had directed agency staff to consult with the Securities and Exchange Commission “to determine which companies merit scrutiny.”
At least 61 public companies — many of them in Silicon Valley — have disclosed that their options granting practices are being investigated by the SEC, the Justice Department or both. Among them are well-known companies including The Home Depot Inc., Intuit Inc., UnitedHealth Group Inc., Caremark Rx Inc. and Barnes & Noble Inc.
The SEC itself says it has at least 80 companies under scrutiny.
At issue in many of the investigations is a practice known as backdating, in which stock options are issued retroactively to coincide with low points in a company’s share price. Such a move can fatten profits for options recipients when they sell their shares at higher market prices.
Backdating options can be legal so long as the practice is properly disclosed to investors and approved by the company’s board, experts say. But backdating can run afoul of federal accounting and tax laws in some cases.
“In light of recent troubling reports of misconduct in connection with the backdating of stock options, the IRS will examine relevant cases to determine that both the companies and executives involved satisfied their tax obligations,” Everson said in a statement.
Also Friday, the independent board that oversees the accounting industry issued a special “audit practice alert” warning auditors to watch for problems in companies’ accounting for stock option grants.
“Auditors planning or performing an audit should be alert to the risk that the (company) may not have properly accounted for stock options, and as a result, may have materially misstated its financial statements,” said the alert issued by the Public Company Accounting Oversight Board.
Everson said possible tax issues in the IRS’ examination include: whether deductions were taken correctly by companies regarding options that were backdated and whether executives who received options accurately reported their sale profits.
On Wednesday, the SEC adopted new rules for what companies must disclose regarding the dating of stock option grants to executives.
The government’s first criminal complaint in a stock options probe came on July 20, when the U.S. attorney’s office in San Francisco leveled fraud charges against Gregory L. Reyes, the former chief executive of Brocade Communications Systems Inc.
Reyes and another former executive of the maker of data storage devices, Stephanie Jensen, also face civil charges lodged by the SEC. Their attorneys have said they are innocent.
A central allegation in the government’s case involves backdating of options awards.