As a preliminary step in explaining the Commission's response to the problem of fraudulent options backdating, it would be useful to put the whole topic of options compensation into some perspective.As you know, during the last year the Commission has been intensely focused on the quality of disclosure of executive compensation. This issue is one of intense public interest because it strikes at the heart of the relationship among a public company's management, its directors, and its shareholders.
I appreciate the opportunity to explain the Commission's initiatives to deal with abuses involving the backdating of options.I am especially pleased to testify together with Chairman Mark Olson of the Public Company Accounting Oversight Board.That, of course, is what is meant by abusive "backdating" in today's parlance.The purpose of disguising an in-the-money option through backdating is to allow the person who gets the option grant to realize larger potential gains-without the company having to show it as compensation on the financial statements.
I will let Chairman Olson speak to the steps the PCAOB is taking to address these issues from the auditing regulator's perspective, but I'd like to assure the Committee, and the public, that the Commission is working in close cooperation with the PCAOB in this important area. But here is a typical example of what some companies did: They granted an "in-the-money" option-that is, an option with an exercise price lower than that day's market price.They did this by misrepresenting the date of the option grant, to make it appear that the grant was made on an earlier date when the market value was lower.