MB657 Fraud Investigation. Business & Marketing Research Paper

Fraud Investigation
Name
Institutional Affiliation
Abstract
Stock option refers to a contract that authorizes holders of shares to sell their shares at any preferred time. There are no legal implications if a shareholder sells his shares to another, following the agreed terms in the signed agreement. For effective consequences, most companies tend to decide on the most appropriate time to implement a stock option in a company. The concept of stock option comprises the idea of backdating, called the stock option backdating. Notably, stock option backdating is a legal concept subject to the set rules. If a company fails to declare its practice of stock option backdating to shareholders, the company, therefore, becomes liable for the charges. The essence of backdating originated in the 1990s, when Micrel Company offered a stock option to its newly recruited employees. Following that, several companies adopted the strategy, though others withdrew shortly. Some companies like Apple, KB Home, and Monster Worldwide were penalized for deliberate and illegal backdating. To combat illicit stock option backdating, it is recommendable to formulate a regulatory body to oversee businesses' operations and promote internal company controls.
Fraud Investigation
Stock Option
A stock option is an agreement that conveys rights to shareholders, though not legal duty to purchase or sell shares of a specific security at a particular price, or prior to a specified date. It is worth noting that it is the seller of the option that solely grants this right. According to Thomas (n. d), there are two notable types of options, and these are calls and puts options. The call option permits the possessor a right to purchase underlying security. Meanwhile, the put options transfer the right to sell an underlying security. In this case, underlying security refers to a specific stock upon which a given contractual agreement is based. In most cases, companies, regardless of the mode of ownership, either privately or publicly owned, practice stock options for various reasons. These may include; a desire to attract and retain good workers, recognize and appreciate their employees, and the need to hire skilled workers by offering them the compensation that a free from salaries.
At times, companies tend to decide on the appropriate time to exercise their stock options, and these are the financial situation and price of the company’s stocks (Dale, 2020). Handling them respectively, companies practice stock options when its costs are lower, compared to the market share price. Positively, this cannot affect a company's operation because its cost of exercising is relatively low. Besides, companies embrace stock options at the time of the company's low stock costs. Conversely, in the company's stock price drops lower than the exercise price of options, there is a possibility of losing more money if a company exercises stock options. Therefore, companies need to be vigilant while exercising stock options to avoid irrelevant losses of money and company collapse.
Stock Option Backdating
There is one other common element of stock option, and this is stock option backdating. In simplicity, a stock option backdating is the refers to the practice o...