Securities and Exchange Commission
has launched an informal inquiry into
past stock-options practices, the retail giant reported.
The move follows Home Depot's report last week that in five instances prior to 2000 it had granted stock options that appear to have been backdated.
In a regulatory filing Friday, the company said it would "fully cooperate" with the SEC's probe.
"Although the company cannot predict the outcome of this matter, it does not expect that this informal inquiry will have a material adverse effect on the company's consolidated financial position or its results of operations," the company said in the filing.
The SEC's probe of Home Depot is only the latest inquiry into the
issue of backdating. In the last month or so, some 50 companies have come under scrutiny by the SEC and other regulators for their past options grants.
Some of those companies also are the subject of shareholder suits.
The issue has to do with the strike price attached to stock options. The value of any employee stock option is the difference between the market price of the underlying stock and the strike price of the option.
Typically, company stock plans require -- and federal regulations encourage -- that the strike price be equivalent to the market price of the stock on the day the option is granted.
But instead of setting the strike price on the date of grant, companies involved in the scandal are accused of awarding options with strike prices from prior dates known after the fact to be short-term lows, in effect giving recipients an immediate windfall.
As unethical as it might sound -- particularly for awarding shares to executives -- backdating isn't necessarily illegal as long as it was allowed for in a particular companies' stock plan and was properly disclosed to shareholders and the government.
But many companies, including Home Depot, appear not to have met those criteria.
The federal government treats options as a tax-deductible payroll expense if their intrinsic value -- i.e., the difference between the market price and the exercise price -- at grant is zero.
But companies can't deduct options that have an intrinsic value at grant, meaning that companies that backdated stocks could potentially run into trouble with the IRS for misreporting their profits and taxes.
Home Depot says that its unrecorded expenses related to the backdated options is less than $10 million. Because of the relatively small size of the unrecorded expense, the company does not plan to restate its financial results for the years affected by the backdated options.
Home Depot shares were off a quarter to $36.16 in after-hours trade Friday.