1. Nice Deduction, Watson

UnitedHealth ( UNH) changed its tune this week.

The Minnetonka, Minn., health insurance giant has come under fire for profligate and possibly illicit executive pay. The furor started in March when The Wall Street Journal reported that UnitedHealth may have backdated options to give recipients bigger gains. The paper also said CEO William McGuire was sitting on a $1.6 billion unexercised stock-option hoard as of year-end.

UnitedHealth responded by authorizing not one, but two probes of the matter, one by the company and one by a special independent panel of the board. UnitedHealth also suspended option grants to top executives. But the company insisted it believed that its grant process was "appropriate."

Judging by Wednesday's quarterly report, UnitedHealth may be having second thoughts about that line now. The 10-Q noted that the Securities and Exchange Commission has opened an options inquiry that could lead to "regulatory fines or penalties or other contingent liabilities."

UnitedHealth stressed that its internal inquiries aren't complete, but results so far indicate the company may need to restate financial results over the last three years to wipe out some $286 million in profit.

"The results of the review to date indicate that the company may be required to record adjustments to non-cash charges for stock-based-compensation expense in periods prior to January 1, 2006," UnitedHealth writes in the quarterly report. "If any such non-cash adjustments were deemed necessary, it may also result in compensation related to certain exercised stock options, previously thought to be deductible, to be nondeductible under Section 162(m) of the Internal Revenue Code."

Potential restatements? Possible tax trouble?

Somehow, "appropriate" isn't the word that comes to mind here.

Dumb-o-Meter score: 93. "We must strive to achieve the highest standards in all aspects of our corporate governance and compensation," McGuire said last week. We'll see what comes of that.

To view Colin Barr's video take on UnitedHealth's entry in Five Dumbest this week, click here .

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