Backdating is the practice of marking a document, whether a check, contract or another legally binding document, with a date that is before what it should be. Backdating is usually disallowed and even can be illegal or fraudulent based on the situation. There are certain situations, however, when backdating is acceptable; however, the parties involved must agree to it.
Breaking Down Backdating
Consider the following examples of common backdating scenarios that are disallowed:
- On Dec. 10, a tenant, who has missed his Dec. 5 deadline for rent payment to his landlord, backdates a check to Dec. 4 and submits the check to the landlord.
- On April 30, a taxpayer, who has forgotten about the April 15 deadline to make a tax-deductible IRA contribution for the previous tax year, backdates a check to April 1 and mails the check to her financial advisor.
- On July 4, a car owner, who did not pay his car insurance premium for July, crashes his car into a parked vehicle while texting. He backdates a check to pay his July premium and submits it to the insurance company.
However, here are a few examples of situations where backdating may be acceptable:
- A person who wants to buy a life insurance policy and make it effective beginning at a date prior to the current date. The insurance company normally will allow this backdating to up to six months, but the policyholder must pay the premium amount covering the prior period.
- Similarly, a person who wants to buy health insurance and make it effective beginning at a date prior to the current date. The insurance company may or may not allow backdating depending on the state where the person lives. If allowed, up to six-month backdating would apply as long as the buyer pays for that time period.
- Two parties in a business contract who explicitly agree in writing that an effective date for the contract can be made at a date prior to the current one. Backdating, in this case, may be useful as the parties, who have already begun acting on the agreement, finish the final details of the written contract.
Examples of Fraudulent Backdating
There was a spate of backdating stock options in the 2000s, mostly at technology firms that rely heavily on stock options for executive compensation, but also at some companies not in the tech sector. The backdating scheme involved moving an effective date for the exercise of stock options from when the options were 'out of the money' to a date that made the options 'in the money' to allow certain executives to exercise their options profitably. Companies such as Comverse, Verisign, F5 Networks, Intuit and McAfee - as well as Home Depot, Michael's Stores and UnitedHealth Group, to name a few - all engaged in this fraudulent activity to varying degrees and were forced to pay fines and penalties and conduct time-consuming and expensive restatements of their books.