Financial statement fraud that harms individual investors, financial markets, and society includes the loss of
retirement funds, employment, community economics and economies. Fraudulent practice of insider trading is an
example. Insiders are corporate managers. Trading refers to buying or selling of the corporation’s common and preferred
stock. Usually the stock that is purchased is authorized, but not yet issued stock.
When the manager buys the stock, it is purchased directly from the corporation and not from current stock
holders. The new stock dilutes the value of the existing outstanding stock. Before the existing stockholders learn of the
new issuance of stock, the managers have sold the new stock at the existing market value that does not reflect the actual
decline due to dilution caused by the increase in the number of shares representing an unchanged corporate total value.
Insiders or managers know about both good and bad news for the corporation before the impact of the news is
reflected in the financial statements. Managers use this news to buy or sell stock for their personal economic advantage.
In the year 2006, the Securities and Exchange Commission addressed the reporting of stock option exercising. The time
frame has been shortened.
Stock options are given as both an incentive and a reward to managers. The option is an opportunity to
purchase common or preferred stock at a certain price. The option is an opportunity to purchase common or preferred
stock at a certain price. Managers would wait for the stock price to rise and then pretend to purchase the stock days or
even weeks earlier when the stock price was lower. Since the stock was purchased directly from the corporation and was
part of the authorized but unissued stock, it was relatively easy for the corporation to record an earlier date than the actual
transaction occurred.
Recording an earlier date than the actual transaction occurred is called back dating. The purchase would be
back dated and the managers would immediately sell the stock for personal profit. Existing stockholders experienced
personal loss. Sometimes this was a dramatic loss for the existing stockholders and thereby the organization.
