During the last quarter new stock options were issued to 2 executives and signed off by the CEO. The options were recorded and listed as of year end, but before the financial statements were issued, the final sign off from the board of directors had not been received and not expected to be granted. Therefore, the options are going to be rescinded. Since it required board approval to be valid should the listing and entry on the books and/or notes to the financial statements as of year-end eliminate the options as if never issue before year-end, or do they have to be recorded and then rescinded in the 1st Quarter. Part 2. They should have never been issued. The CEO should not have signed off without board approval. Would this be considered a material weakness or because it was uncovered before the issuance of the financial statement and no material mistake appeared, does not require a note.
Accounting for unauthorized options
Answers
Not properly authorized = never happened. Eliminate from books as if never issued before year end.
Having a bozo CEO is a material weakness, but I would not require a note.
Without Board approval, the issuance was not legally binding. Should not be on the books at year-end. Although, you might assess if there is a contingent liability created by the promise of an award that should be accrued for. That is really a legal matter.
You need to assess the materiality of the potential error. How many awards could he have issued exposing the Company to liability and at what magnitude - either to the promised recipients or from a shareholder lawsuit? If deemed material, then, that would be considered a material weakness. If a contingent liability was created, then that would require footnote disclosure. If deficiency is assessed as a material weakness, then it would require reporting in the internal controls section of SEC filings... as well as in discussion of Risk Factors.