Options Backdating, Tax Shelters, and Corporate Culture

Abstract:     
This Essay examines the problem of tax noncompliance through the prism of the options backdating scandal. The noncompliance of backdating was obvious, at least to tax lawyers. Backdating wasn't a sophisticated tax scheme. Rather, the noncompliance was collateral damage from weak internal controls and, in some cases, the rent-seeking of executives.

Noncompliance in the face of clear rules is an overlooked problem in the corporate tax shelter literature, which tends to focus on disclosure, deterrence, or statutory interpretation. We should also study what creates the demand for tax shelters. The evidence from backdating suggests that a fast-and-loose attitude can develop when innovative companies outgrow their internal controls. When viewed in institutional context, a subset of corporate tax shelters, although adorned with more formal attire than backdating, may also be best understood as a compliance issue rather than a problem of textualism or inadequate penalties.

The implication for law reform is that process matters. Culture matters. We may have more success in closing the tax gap if we support procedural changes in the way companies approach tax compliance rather than altering the substantive rules in ways that may have unintended consequences for non-fraudulent transactions.

Keywords: options backdating, executive compensation, corporate tax, tax shelters, tax avoidance, corporate culture, Sarbanes-Oxley

JEL Classifications: G34, J33, H24, H25

Working Paper Series