ACS Execs Latest to Resign After Stock Options Probe

November 27, 2006 ( - Affiliated Computer Services, Inc. (ACS) has announced that it has concluded its internal investigation into the firm's stock options grant practices, and the company's CEO and chief financial officer (CFO) have resigned.

According to the announcement, the investigation concluded that certain conduct of CEO Mark King and CFO Warren Edwards violated the company’s Code of Ethics for Senior Financial Officers. King and Edwards have resigned, effective November 26, and have entered into separation agreements.

The investigation, which was conducted by a special committee of ACS’ board of directors and independent legal counsel, reviewed the company’s stock options grant practices from 1994 through 2005. The investigation concluded that in a significant number of cases former CEO Jeffrey Rich, King and/or Edwards used hindsight to select favorable grant dates for options granted. In addition, recommendation memoranda related to these grants were intentionally misdated at the direction of Rich, King, and/or Edwards to make it appear as if the memoranda had been created at or about the time of the chosen grant date, when they had been created afterwards. As a result, stock options were awarded at prices that were at, or near, the quarterly low and the company effectively granted “in the money” options without recording the appropriate compensation expense, the announcement said.

ACS further said King and Edwards violated the company’s code of ethics with respect to the company’s May 2006 Form 10-Q. Note 3 to the Consolidated Financial Statements stated, in part, that the company did “not believe that any director or officer of the Company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price.” According to ACS, at the time the May 2006 Form 10-Q was filed, King and Edwards either knew or should have known the term “backdating” was readily applicable to the company’s option grant process, but neither informed the company’s directors, outside counsel or independent accountants. Instead, both King and Edwards attributed the disparity between recorded grant dates and the creation dates of the paperwork for stock option grants to other factors, ACS said.

ACS currently expects that the incremental non-cash compensation expense related to incorrect accounting measurement dates will be approximately $51 million plus additional tax related expenses, according to the announcement. ACS said it has not yet determined the impact of these accounting adjustments on its historical and current period consolidated financial statements or whether it will be required to restate its consolidated financial statements as a result of these adjustments.