Moody’s Investors Service says that investigations into stock options backdating could prompt financial restatements. Credit quality is not likely to be affected, but corporate images could suffer, it explains.

Backdating takes place when a company retroactively dates stock options, presumably to a time when its stock was trading at a lower price, setting the strike price at a lower level to the benefit of the recipient, the rating agency explains. Moody’s observes that backdating is not necessarily illegal if it conforms to a company’s option plan and is accounted for properly.

Moody’s says that the U.S. Securities and Exchange Commission and Department of Justice inquiries into the possible practice of “backdating” stock option grants at more than 20 U.S. companies may lead to additional rating or outlook changes beyond the single change in an outlook that has occurred so far.

“A finding of improper backdating could impact an issuer’s credit rating,” says Moody’s corporate governance analyst Jeffrey Benner. “Moody’s is following developments at each issuer, and may take additional actions on outlooks or ratings or both as information becomes available.”

Although the inquiries may well lead to some financial restatements (as some companies have already announced), Moody’s says these should not significantly affect credit quality. Instead, it says damage to credit quality could arise from fines and legal costs, executive departures, tarnished corporate images, and evidence of questionable corporate governance practices.

Benner says that at some companies “a finding of backdating may indicate an aggressive culture, lack of proper board oversight, a failure of financial reporting controls, and ineffective ‘tone at the top,’ with negative credit implications.”

It also notes notes that in most cases the inquiries into backdating are focused on awards made prior to 2002, when the SEC implemented new disclosure requirements for option awards that substantially reduced the potential for abuse.

Moody’s says that, to the best of its knowledge, six Moody’s-rated companies are currently the subject of informal SEC inquiries or have been asked by the DOJ to supply further information on the timing of some options. These six are Affiliated Computer Services, American Tower, Caremark Rx, Jabil Circuit Inc., Juniper Health, and UnitedHealth.

The rating agency notes that regulators have yet to accuse any company of wrongdoing. Moody’s has so far cited the inquiries as a factor in only one rating action, when Moody’s lowered the outlook on UnitedHealth Group from stable to negative on May 22.

“For those companies facing scrutiny, we would view a prompt, thorough, and fully independent investigation under the direction of the independent board members to be an important, positive factor as we determine company credit risk and corporate governance quality,” says Benner.