Tech agenda could face backlash over backdating

SAN JOSE, Calif. — Just when Silicon Valley looks to be flexing some serious muscle in Washington, D.C., the stock-options backdating scandal comes along and threatens to blow up the technology industry's lobbying agenda.

One of the first casualties could be much-needed relief for small companies burdened with heavy accounting costs imposed by the Sarbanes-Oxley law. This is the same law enacted four years ago after the highly publicized collapse of Enron, aimed at stopping CEO-enrichment scams.

Other tech issues could get cold-shouldered inside the Beltway should the backdating scandal, which now involves 21 companies in the valley and about 50 nationwide, keep growing.

Who in Congress, for example, would vote to increase the number of visas for foreign engineers — a move sure to provoke accusations of tech companies seeking low-wage replacements for U.S. engineers — when greedy technology CEOs have their hands prominently in the cookie jar?

The blowback could even extend to issues unrelated to compensation, such as patent reform and increased federal spending on basic research.

Politicians are already talking tough.

"It's bothersome to think that after the corporate scandals of recent years, some executives are still looking for ways to cook the books for personal gain," Iowa Sen. Chuck Grassley said Tuesday after holding hearings on backdating.

"I was glad [U.S. Department of] Justice officials made it clear today in response to my questions that executives can face possible prison time for backdating stock options."

How much damage Silicon Valley ultimately suffers in D.C. depends on two open questions.

The first question: How big is the backdating scandal?

If you've been avoiding stories about backdating because they're complicated, I'll spare you a detailed description. The simple version: Corporate executives and directors stand accused of gaming the system, if not breaking the law, by jiggering the dates of stock-option grants to maximize their own profit at the expense of other shareholders.

Among the 21 local companies caught up in the backdating furor are more than a few big names, including Intuit, Juniper Networks, KLA-Tencor, Macrovision, McAfee, Rambus and Sanmina-SCI.

While some backdating may have involved poor record-keeping, there are egregious cases in which it's difficult to believe there wasn't cheating.

If the national count stops at 60 or 70 companies under investigation, this might blow over quickly. If the count hits 600 or 700, backdating could become impossible for Congress to ignore.

The second question: Did Sarbanes-Oxley fix the problem?

First reports of backdating, which surfaced in March, occurred in the dot-com boom era — 1997 to 2001 — when tech stocks were surging and backdating more lucrative.

Sarbanes-Oxley supposedly plugged that loophole by tightening the rules for reporting when options are granted.

If no post-Sarbanes-Oxley backdating emerged, Silicon Valley executives could collectively shrug and say, "We may have gotten carried away during the boom, but that door has been closed and no further action is necessary."

But as Mark Schwanhausser reported Thursday, cases of apparent backdating after the Sarbanes-Oxley rules went into effect are now under investigation.

If it's firmly established that backdating continued after Sarbanes-Oxley, we can expect lots of congressional hearings and bills. The time spent on this would surely come at the expense of other Silicon Valley agenda items.

The item mostly likely to get short shrift is reform to Section 404 of Sarbanes-Oxley, which sets the details of how corporations audit their financial results.

A big company like Hewlett-Packard might spend $5 million a year to meet its 404 obligations, negligible when annual revenues are $89 billion.

But small companies can pay as much as $1 million a year, which can eat much of the profit in a business with annual sales of $50 million to $100 million.

Initial public-stock offerings, the most lucrative way for successful startups to pay off early investors, have been down in the last few years, at least in part because small companies want to avoid Sarbanes-Oxley 404 costs.

The Securities and Exchange Commission announced some easing of 404 rules for small companies last month. But most valley leaders support bills now before the House and Senate that would force a bigger rollback.

A healthy IPO pipeline is vital to Silicon Valley's future. It would be tragic if needed reforms are stalled because of the backdating scandal. But the CEOs advocating relief would have no one to blame but themselves.

Mike Langberg is a columnist for the San Jose Mercury News.