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In light of recent Stock Options backdating scandals, organizations are reviewing their stock option granting procedures to identify areas of exposure from past practices and to improve practices for the future. Incorrect practices in stock options grants can result in the organization taking incorrect tax deductions that may lead to requirements to revise prior tax returns and subject the company to IRS penalties. In addition if the compensation expense is not recorded or under recorded, then the historical financial results may need restating. Due to such practices, companies could face shareholder class action or pension plan lawsuits and may lead to fines, civil and criminal penalties. Officers and directors may be sued in derivative lawsuits for breaching their fiduciary duties in connection with the granting and improper reporting and other treatment of backdated options. Depending on the facts and circumstances, company indemnification and D&O insurance may not cover such liability.
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New rules applicable to SEC reporting companies governing executive compensation disclosure went into effect on December 15, 2006. Required disclosures will include the grant date of options, fair market value on the grant date, the closing market price and the strike price of an option on the grant date if the latter is lower, the date the committee or board took action to grant the option (if different from the grant date), and a description of the methodology for determining the option price if it varies from the closing market price on the grant date.
MetricStream enables organizations to continually audit their stock option grant processes and assess internal controls to identify risks and validate compliance with SEC requirements as well as the board compensation committee policies. In addition, MetricStream can ensure that companies have a repeatable mechanism to document gaps and deficiencies in their process and remedy them in a timely manner.
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