Home Depot probe finds option errors covering 26 years
Home Depot Inc. said Wednesday that an internal investigation of the company’s stock option practices has concluded that errors caused it to have about $200 million in unrecorded option expenses over a 26-year period.
Despite the errors, the review, conducted with the help of outside counsel, determined that there was no intentional wrongdoing by any current member of the company’s management team or its board of directors.
Home Depot, the nation’s largest home improvement store chain, did not make an assertion about the integrity of actions of previous management.
However, it said that for many years management personnel who had since left Home Depot generally followed a practice of reviewing closing prices for a previous period and selecting a date with a low stock price to increase the value of the options being granted to certain employees. The option grants were subsequently approved by the board.
The practice is known as backdating, and it has resulted in reviews of stock option practices at a number of big corporations.
The unrecorded stock option expense at Home Depot covers the period from 1981 to the present, and it excludes related tax consequences.
The review also found:
* In numerous instances, and primarily before 2003, beneficiaries of grants who were required to report them to the Securities and Exchange Commission failed to do so in a timely manner or at all.
* Numerous option grants to rank-and-file employees were made “pursuant to delegations of authority that may not have been effective” under the laws of Delaware, where Home Depot is incorporated. A Home Depot spokesman refused to explain what that means, but Anthony Sabino, a St. John’s University business professor, said it suggested whoever was authorizing options might not have been the best person to do so.
Atlanta-based Home Depot said in a statement that it did not consider the errors to have a material effect on the company’s financial statements.
But the company said correction of the errors would result in an increase to paid-in capital of about $200 million and a decrease to retained earnings of the same amount.
The SEC and federal prosecutors are reviewing Home Depot’s stock option practices. As a result, the company declined to comment beyond its statement and a quarterly report it simultaneously filed with the SEC.
Home Depot announced the findings after the close of regular trading, where its shares added 55 cents to $39.92. Shares fell to $39.50 in after-hours trading.
