Is Accounting for Stock Options Manipulated Before and After an Initial Public Offering?

Flood, Natalie Marie (2016) Is Accounting for Stock Options Manipulated Before and After an Initial Public Offering? Undergraduate thesis, under the direction of Rick Elam from Accountancy, The University of Mississippi.

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Abstract

Stock option accounting is an area in financial statements that requires substantial estimates and management discretion. Previous research in the area of stock option accounting has found that valuations of options and subsequent accounting methods have been incorrectly stated to aid a company to look financially stronger. Companies that are about to undergo an initial public offering have the most incentive to incorrectly state the value of their options. However, all of these studies have used financial data from financial statements dated before 2004. This is significant because FASB Standard 123(R) (2004) and the Sarbanes-Oxley Act (2000) have both been put into practice since most of the data has been analyzed. Both of these could have significant influence on the way that stock option accounting is completed for public companies. This study seeks to examine financial data from after the issuance of FASB Standard 123(R) and Sarbanes- Oxley to determine if manipulation and undervaluation of options is present. The data will be examined to determine if there is a change from before an initial public offering and after an offering. If companies have continued to undervalue the options, the overall stock based compensation expense will be understated and therefore companies could appear to have a higher net income figure. The study is comprised of financial statement analysis of three companies that went public in 2011: Jive Software Inc, LinkedIn, and the Zillow Group. There are gaps in the financial reporting of companies, which leave room for further investigation. The three companies did show evidence of undervaluation, but a larger study would be needed for statistically conclusive proof.

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