How to Prevent Fraudulent Reporting in Accounting for Stock Options

Fraudulent stock options reporting can be prevented with strict internal checks and balances.

Accounting fraud can happen in just about any company. Repricing or backdating stock options are forms of accounting fraud that can have serious implications for a company's management. Companies may commit this type of fraud as part of a non-cash means to enhance pay or bonuses for employees or executives. Unfortunately, accounting fraud may not be detected for years. The Sarbanes-Oxley Act of 2002 requires publicly traded companies to have tight internal mechanisms for financial reporting and to be transparent in financial disclosures. Companies who want to prevent fraudulent reporting of stock options must adopt strict internal controls and document every transaction.

Instructions

1. Identify what positions are responsible for assets and record keeping. Examine the procedure for documenting all stock option transactions within the company. Assess the internal control mechanism for insuring correct data recording and stock transactions.

2. Segregate duties so that no one employee controls the assets and the bookkeeping. Establish a process of requiring two or more signatures for releasing stock options to employees. Establish a protocol requiring all stock options pricing and dating to be reviewed by more than one person and confirmed by multiple signatures before information is publicly released, options are cashed by any executive and reports are given to the board of directors.

3. Create a document flow process that ensures all transactions and reports are supported by the necessary paperwork. Create expense reports for all stock options issued to employees.

4. Conduct routine internal and independent audits to confirm all assets and liabilities. Review all documents supporting stock office transactions. Compare records with those presented to board directors and shareholders. Calculate the value of stocks on the open market and compare to options pricing.

5. Set up a fraud hotline for employees to anonymously report suspicions of fraud. Route the number to a voice mail box that can be checked by Securities and Exchange Commission regulators, independent auditors and internal compliance auditors every quarter.

References

• The San Diego Union-Tribune: Stock-Options Fraud Often Undetected
• Lawyers.com: Beware of Accounting Fraud
• Wisconsin Law Journal: Fraud Prevention 101
• The New York Times: So Many Millions, So Little Body Armor