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For right now, it's about earnings--not ethics

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April 25, 2007

For right now, it's about earnings--not ethics

Peter Burrows

It's as though Steve Jobs planned it this way. Just a day ago, the focus was on his role in the backdating that occurred at Apple, courtesy of the complaint issued by the SEC against former Apple chief counsel Nancy Heinen and former CFO Fred Anderon--not to mention Anderson's press release placing Jobs at the center of the shenanigans.

But that was then. Today, such drama will surely be drowned out by news of yet another blockbuster quarterly announcement from Apple. The company posted a remarkable 88% increase in earnings, on revenue growth of 21%. Here's The highlight: a 36% increase in Mac sales against a PC market that's growing single digits, suggesting that the long-awaited uptick in Mac market share is gaining steam.

No doubt, Jobs' role in the backdating scandal won't go without scrutiny for long. Given the news yesterday--and despite the board's reiteration of its support for Jobs today--it's clear this situation is more than a simple case of good guys and bad guys. True, only Heinen and Anderson were charged. But reading the e-mails from Heinen in the complaint , it's clear that Apple's top brass--including Jobs--had discussed backdating in the past and were familiar with it (see paragraph 17 of the complaint). To give the benefit of the doubt, it could be that Apple executives simply saw nothing wrong with the practice, under certain circumstances; clearly, backdating was common at the time, so they wouldn't have been alone. At worst, Heinen's emails suggest Jobs & Co. not only embraced the practice, but knew it was wrong.

But given those quarterly numbers, the discussion for the moment will be about earnings--not ethics. As I write, Apple shares are up 6.19% in after-hours trading. Which brings up a larger point: from the shareholder perspective, this whole backdating business doesn't amount to a hill of beans. Since 2001, when the backdating allegedly occurred, Apple's stock has risen more than 1000%, and investors clearly await many years of continued stellar performance. Next to that, the non-cash charges taken by the company are a non-event, at least financially. At the end of the day, the most financial damage will not be from the backdating, but from the backdating investigation. I'd bet the lawyers, accountants and crisis consultants have racked up at least $25 million in billings so far--and that's cold, hard cash, not non-cash expenses that exist only on financial statements.

UPDATE: I got a comment to this post from a reader who points out, correctly, that backdating is not illegal or wrong--so long as it is properly accounted for and properly expensed. This is absolutely true, and I should have pointed it out (as I am usually careful to do, to avoid this common misperception). Still, the government claims that Apple should have treated the two grants as "in-the-money" and expensed them as such, which it didn't do. So, as Mark suggests, the key question for the courts will not be whether Jobs knew backdating had occurred, but whether he understood that backdated options had not been properly accounted for.

05:57 PM

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You comment that "at worst, Heinen's emails suggest Jobs & Co. not only embraced the practice, but knew it was wrong." Except that it isn't, which is a misconception that seems to follow this type of story around. Backdating isn't "wrong" (illegal, improper, whatever) as long as it is accounted for properly, which is the entirety of the issue in Apple's case -- the backdated grants weren't accounted for, and the SEC has wanted to know whether this was deliberate and if so, who knew about the "oversight". Jobs could have sent 100 emails saying, "Backdate the heck out of my grants so I make the most money possible" and he wouldn't be in any hot water (at least with the SEC) as long as he could show he wasn't aware that the backdated grants were slipping through the accounting cracks.

Posted by: Mark U. at April 25, 2007 07:35 PM

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