Jive Software, LinkedIn, and Zillow presented similar ways of accounting and valuation of options. However, through the financial statement analysis, different issue arose from each companies financial statements. The trends in the expenses and exercise amounts vary between companies. All three companies saw a large surge in
compensation expense and cash received from exercise of options in the year of initial public offering, 2011, and the years that followed. An increase in compensation expense in the year of the initial public offering could be an indication that the company was minimizing these expenses in the years previous to appear stronger on their income statement. There is not enough conclusive data to make a claim that companies use discretion or incorrect accounting procedures before an initial public offering. The
compensation expense increase could be simply a result of the options becoming publicly traded. However, the discrepancies and unbalanced entries do bring about a possibility that the expenses could have been manipulated. The notes to all three sets of financial statements were very detailed, but none of the notes gave any indication as to where the missing values came from. More information that is not readily available would be necessary to determine if the unbalanced entries result from management discretion.
The information regarding individual companies’ stock compensation is not public information. However, considering that registered accounting firm audits all of these companies, some stock-based compensation testing has been performed. The only
presented in the annual report and the auditors have determined those figures reasonable.
Previous research in the field leads to the hypothesis that companies have incentive and opportunity to incorrectly value options, however without the information that is confidential to the individual companies, it is difficult to definitively prove or disprove the hypothesis.
After a thorough analysis of the financial statements of Jive, LinkedIn, and Zillow and the notes to the consolidated financial statements, more research needs to be
completed. The previous research in this area was not done up to date with the change in standards and therefore, this study was worthwhile to consider how the new standards have changed the way that stock option research should be conducted. More advanced statistical models and information from the companies that is not disclosed could be important to reaching conclusions to this hypothesis.
Table 5-1: Summary of All Three Companies’ Option Expense 2009-2013
!"!!!!
!20,000,000!!
!40,000,000!!
!60,000,000!!
!80,000,000!!
!100,000,000!!
!120,000,000!!
!140,000,000!!
!160,000,000!!
!180,000,000!!
!200,000,000!!
2009! 2010! 2011! 2012! 2013!
Expense'($)'
Stock'Option'Expense'
Jive!
LinkedIn!
Zillow!
This graph shows all three start-up companies on one plane to exemplify the change in option expense from two years before public offerings in 2009 to two years after the public offering in 2013. The vertical line on the graph marks 2011 and indicates that the left half of the graph shows pre-IPO expense amounts, whereas the right half presents the post-IPO expense amounts. As shown by the graph, the trend is consistent among all three companies, around the initial public offering the expense amount
increase exponentially. This is a sign that expense manipulation could be present among firms undergoing an initial public offering. However, to definitely prove this idea a larger scale study would need to be conducted.
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