Backdating: Definition, How It Works, Legality, and Examples

What Is Backdating?

Backdating is the practice of marking a document, whether a check, contract, or another legally binding document, with a date that is prior to what it should be. Backdating is usually disallowed and can even be illegal or fraudulent based on the situation. Sometimes though, backdating can be acceptable; however, the parties involved must agree to it.

Key Takeaways

  • Backdating is the practice of marking a check, contract, or other legally binding agreement with a date that is prior to the current date.
  • Backdating is usually not allowed and even can be illegal or fraudulent in some situations.
  • However, there are times when backdating can be acceptable, but the parties involved must agree to it.

Understanding Backdating

Consider the following examples of common backdating scenarios that are not allowed:

  • 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 individual retirement account (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.

Here are a few examples of situations where backdating may be acceptable:

  • A person wants to buy a life insurance policy and make it effective beginning at a date prior to the current date. The insurance company normally would allow this backdating to occur for as much as six months earlier, but the policyholder must pay the premium amount covering the prior period.
  • A person 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, backdating for a six-month period would apply as long as the buyer pays for that time.
  • Two parties in a business contract explicitly agree in writing that an effective date for the contract may be made at a date prior to the current one. In this case, backdating could be useful because the parties had already begun acting on the agreement as they were finishing the details of the final written contract.

Examples of Fraudulent Backdating

In the 2000s, there was a spate of backdating stock options, 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 the effective date for exercising the 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 Apple, Comverse, and McAfee—as well as Broadcom, Monster Worldwide, and UnitedHealth Group (UNH)—to name a few, 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.

Article Sources
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  1. U.S. Securities & Exchange Commission. "Spotlight on Stock Options Backdating." Accessed Feb. 3, 2021.

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