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Backdating may also violate accounting rules because the stock options, which are equal to extra pay, affect the company's bottom line.
By failing to include these options in their books, companies may be overstating their profits – and may, ultimately, have to restate their financials.
Take this example, from The Wall Street Journal, which began investigating the practice last fall: "Suppose an executive gets 100,000 options on a day when the stock is at $30.
Exercising them after it has reached $50 would bring a profit of $20 times 100,000, or $2 million.
Company stock option plans are on file with the SEC, with a description of how the strike prices are calculated.