This excerpt taken from the UNH 8-K filed Oct 16, 2006.
During the time period covered by the Special Committee review, there were inadequate internal controls at UnitedHealth related to the option grant practices outlined above.
For the relevant period, the Company lacked appropriate systems to ensure adequate communication among the Accounting, Legal, and HR Departments pertaining to the option grant process. Without such controls, information needed to determine an accurate measurement date was not provided to the Accounting Department.
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In view of the significant role of stock option grants in UnitedHealth compensation, the HR employees responsible for administering grants for new hires and promotions and for non-Section 16 employees should have known the rules governing option grants. The Company lacked appropriate systems to review existing policies and practices against rules governing option grants. Controls were also inadequate in that documentation to support the option grants was not adequately maintained.
The Legal Department failed to prepare adequate minutes of meetings of the Board of Directors, the Compensation Committee and the Ad Hoc Committee. Sufficient descriptions of the matters considered and discussed in such meetings with respect to stock option grants rarely appeared in the minutes or other board materials. Although the Directors stated that Section 16 option grants were generally discussed and often approved at regularly scheduled Compensation Committee meetings, the majority of the minutes of the meetings are either entirely silent on the Committees consideration of those grants or make only vague or incomplete (and potentially inaccurate) references to what actually occurred in this regard. For example, in the case of the minutes of the August 2000 Board meeting at which the reactivation of the suspended options was authorized, a draft of the minutes at one time included reference to the reactivation. The final minutes omit that reference. For the November 5, 1999 meeting of the Ad Hoc Committee at which we believe Dr. McGuires and Mr. Hemsleys new employment agreements were finally approved, no minutes appear to have been prepared.
There were inadequate control mechanisms within the Accounting Department to ensure that the information about option grant dates and the exercise prices accurately reflected the true measurement dates for accounting purposes. Absent adequate controls, the Accounting Department could not determine with confidence whether any discounted options had issued and whether a compensation expense had to be booked. Where Accounting personnel were made aware of grant practices associated with option grants to new hires, some were unaware of the appropriate accounting rules and others determined that any impact would not be material to the financial statements. With respect to the supplemental grant, the Accounting Department appears to have recognized some of the issues but failed to take appropriate action.