PCAOB Issues Alert On Accounting For Stock Options

by Glen Shapiro, LawAndTax-News.com, New York

01 August 2006

The Public Company Accounting Oversight Board on Friday announced an initiative to publish, from time to time, Audit Practice Alerts issued by the Board’s staff.

These alerts will highlight new, emerging, or otherwise noteworthy circumstances that may affect how auditors conduct audits under the existing requirements of PCAOB standards and relevant laws.

The practice alert issued last week, entitled "Matters Relating to Timing and Accounting for Options Grants," was prompted by recent reports and disclosures about issuer practices related to the granting of stock options, including the "backdating" of such grants.

These reports and disclosures indicate that some issuers’ actual practices in granting options might not have been consistent with the manner in which these transactions were initially recorded and disclosed. Some issuers have announced restatements of previously issued financial statements as a result of these practices.

In addition, some of these practices could result in legal and other contingencies that may require recognition of additional expense or disclosure in financial statements.

The alert advises auditors that these practices may have implications for audits of financial statements or of internal control over financial reporting, and discusses factors that may be relevant in assessing the risks related to these matters.

It also emerged last week that the Internal Revenue Service is conducting a probe into the reporting of stock options for tax purposes by up to 40 US firms.

According to reports, the two key issues under IRS scrutiny are misreporting of income by executives, and improper tax deductions taken by companies. The probe covers backdated stock options cashed in the period since 2002.

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