1. Backdating stock options per se is not what's the legal problem -- it's that failing to account correctly for the resulting compensation charges ("comp charg

1. Backdating stock options per se is not what's the legal problem -- it's that failing to account correctly for the resulting compensation charges ("comp charges") can result in materially-false filings with the SEC. 2. It's a different problem as far as the internal politics are concerned. When a company properly records such comp charges in its financial statements, can depress a company's financial results and with it the stock price. Hence, there's an incentive to avoid recording such charges if at all possible. 3. Now consider the interest groups / constituencies and their incentives: + Employees, sometimes vociferously, want the lowest strike prices they can get for their stock options -- that can be especially true for executives who have big grants -- and they want the stock price to be as high as possible (hence they're not wild about recording comp charges). + Board members would like to keep employees happy, especially executives, and of course themselves and their fellow board members, if they can. Issuing options with an in-the-money strike price can often appear to be a cost-free way of promoting general happiness. + On the other hand, the constituencies that have a strong interest in strict legal compliance -- mainly the law and finance departments -- are often weaker politically than the ones who want the low strike price and the high stock price. As a result, there can be a lot of subtle pressure on a CFO. Employees and even senior executives can say, "look, doing this in-the-money option grant, without recording a comp charge, is OK with our audit firm and with our outside counsel --- what's your problem? Why shouldn't we rely on them?" (The unstated subtext being, they're the experts, not you, and we like their answer better than yours.) Finally, let's not forget that outside accounting- and law firms are motivated to keep their clients happy, to be perceived as team players, and ultimately to get hired for repeat business. They definitely have incentives to tell clients what they want to hear if they can possibly do so. Stir in the fact that when these professionals can come up with "creative" ways to make their clients happy, they gain in reputation with other potential clients and with their professional peers. All this means that the company's senior executives and its compensation and audit committees need to be willing and able to stand up to the pressures the other way. That's been made easier by the news reports of people going to jail and being permanently barred from serving as officers or directors of public companies.