The use of stock options to compensate executives has become much more common in recent years. The increased use of options to compensate executives is based on efforts of boards of directors to align the interests of managers and stockholders. Prior to the implementation of FAS 123R, firms would often report the stock options expense only in a footnote-the expense did not flow through the income statement.
a. Discuss why managers would desire to report the expense of stock options in the footnotes of the financial statements rather than in the body of the income statement.
b. Discuss whether the practice of reporting stock option expense only in the footnotes was unethical or misleading.
c. Research the topic "backdating stock options." Discuss the motivation for backdating options and whether this is an ethical practice.