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In this litigious society, shareholders will almost certainly file a class-action lawsuit against the company for filing false earnings reports.

In the worst cases of options backdating abuse, the stock exchange on which the offending company's stock trades and/or regulatory bodies such as the Securities and Exchange Commission (SEC) or National Association of Securities Dealers can levy substantial fines against the company for perpetrating fraud.

The practice sometimes also occurs in the insurance industry, whereby policy issuers make the effective date of a policy (or claim) earlier than the application date in order to obtain a lower premium for the customer (or obtain better claim results).

For example, let's assume that John Doe is the CEO of Company XYZ.

The well-known data storage company allegedly manipulated its stock options grants to ensure profits for its senior executives and then failed to inform investors, or to account for the options expense(s) properly.Clearly, for those who own shares in companies that don't play by the rules, options backdating poses serious risks.If the company is punished for its actions, its value is likely to drop substantially, putting a major dent in shareholders' portfolios.(To learn more, see .) Cost to Shareholders The biggest problem for most public companies will be the bad press they receive after an accusation (of backdating) is levied, and the resulting drop in investor confidence.While not quantifiable in terms of dollars and cents, in some cases, the damage to the company's reputation could be irreparable.

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