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Aon restates to correct option grants errors

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CHICAGO—Aon Corp. said last week that it would restate its financial results for several periods after a review of its options granting practices revealed unrecognized compensation expenses.

Analysts say Aon's restatement was not significant, though whether federal regulators and plaintiffs lawyers will react to Aon's accounting errors for stock options remains to be seen, attorneys say.

So-called backdating--the deliberate granting of options on the most favorable date for a recipient--has prompted investigations by securities regulators and has resulted in shareholder litigation and the departure of key executives from some companies, including Dr. William W. McGuire, CEO of United Health Group Inc.

The errors Aon identified in its internal review, though, were "clerical" in nature and not motivated by or for anyone's gain, according to a spokesman for the Chicago-based brokerage.

The accounting mistakes, which resulted in a $2 million pretax increase in compensation expense in 2006 and $3 million pretax increase in 2005, are not material to Aon's earnings for any of the affected reporting periods, he said.

The cumulative impact of the accounting errors over the 1994 to 2006 period, however, was $66 million and is "considered sufficiently material to warrant restatement," Aon said in a Securities and Exchange Commission filing last week. The restatements will affect reporting periods for 2003, 2004, 2005 and for the first three quarters of 2006.

Aon said last month that its audit committee had started a comprehensive review of its option grant date practices after discovering that incorrect measurement dates for certain stock options granted in 2000 and in certain prior years appeared to have been used for "financial accounting" purposes.

That review found no misconduct by current or former management or directors, Aon said in its SEC filing. But it "did reveal a limited number of instances in which options were granted as of a prior date, for example, to honor employment or other previously made contractual commitments." No evidence was found that the selection of grant dates "was motivated by pricing consideration," Aon said.

"Although the resulting changes in stock compensation expense were not material to Aon's financial statements in any year, in accordance with recent SEC guidance Aon was required to restate stock compensation expense for several years in its regularly filed form 10-K for 2006," Aon said in a statement.

The SEC--which began focusing on companies' improper stock options practices, including backdating, in 2006--is examining more than 130 companies for improper options practices, a spokesman said last week. He declined to say whether Aon is or will be the subject of such an investigation.

Cliff Gallant, an analyst with Keefe, Bruyette & Woods Inc. in New York, said that at first glance, Aon's restatement doesn't appear to indicate any major problems.

"It doesn't appear there was anything improper done in this case," he said.

Aon has been "going through a restructuring in every sense of the word in the last two years, and part of that is updating and looking at their financial reporting and this might be part of that," Mr. Gallant speculated. "Certainly, in today's legal environment, being proactive is the safe way to go."

"We think it is an isolated mistake and not a sign of any major or systemic problem," said Bruce Ballentine, lead Aon analyst at Moody's Investor Services in New York.

However, one securities litigator who asked not to be named called Aon's decision to voluntarily restate financials "very unusual."

"In terms of an obligation, you are not required to restate unless there is a material restatement," the source said. "Usually people don't do it voluntarily, because you don't want the stigma."

"It sounds like the company thinks that it is not material, but the plaintiffs bar might disagree," the source said.

Stock-drop lawsuits are "the real engine of the plaintiffs class action securities bar," according to William G. Passannante, a partner at New York policyholder law firm Anderson Kill & Olick P.C.

"If that's not present, most of the significant class action plaintiffs lawyers wouldn't be interested in pursuing that type of claim, because there isn't a dollar sign at the end of it," Mr. Passannante said.

Aon's shares closed Friday at $37.56, up less than 1% for the day.

Jacob S. Frenkel, a former SEC enforcement lawyer who is now a partner at Shulman, Rogers, Gandal, Pordy & Ecker P.A. in Rockville, Md., said, "It's been well known that the options backdating cases would not necessarily result in an (SEC) action," and "this may prove to be one of those instances."