RIM, the Canadian BlackBerry manufacturer, will restate its earnings by up to $250 million after an internal review found that its procedures for awarding stock options to employees were seriously flawed.

A special committee set up to examine the practice found that the company failed to maintain accounting controls over the issuance of options, and that in some instances, including in connection with grants to the company’s co-chief executives, hindsight was used to select favourable dates.

The company will restate its earnings for the past three years by as much as $250 million -- more than three times the amount by which Apple said it would restate earnings when it presented the findings of a similar internal review in December.

In a related announcement, RIM said that its chairman, Jim Balsillie -- under whose authority the vast majority of the options grants were made -- will step down. Dennis Kavelman, the chief financial officer to whom responsibility for granting options was frequently delegated, has also resigned.

Mr Balsillie will retain his role as co-chief executive alongside Mike Lazaridis, however.

The period covered by the review dates back to December 1996, and covers 3,231 stock option grants issued to new and existing employees, as well as directors.

In a damning report, the committee said that the grant process was “characterised by informality and a lack of definitive documentation” and “lacked safeguards to ensure compliance with applicable accounting, regulatory and disclosure rules”.

“In many instances, including in connection with some option grants to the co-chief executives, chief operating officers, and the chief financial officer, hindsight was used to select grant dates with favourable pricing, resulting in grantees receiving an in-the-money benefit that was not recorded in the financial statements,” it said.

All the grants awarded before February 27, 2002 were accounted for incorrectly, the report found, because of a failure to apply “variable accounting” as required by the company’s stock option plan.

Of those made from February 28, 2002 onwards, just under two thirds -- or about 321 grants, in respect of options to acquire 4,581,000 shares -- had “incorrect measurement dates”.

In some cases, the report found, there was no documentation that would enable a determination as to whether a measurement date was the same as a grant date, meaning that the company would have to determine the measurement date “on the most objective evidence available”.

The report reserved special criticism for Mr Balsillie and Mr Kavelman, who “reported that at the time they had a general understanding” of the reporting requirements for options under Canadian regulations. “Their understanding was incorrect,” it said.

RIM, which is the subject of a separate, related inquiry by the Securities and Exchange Commission, said: “We are treating this issue very seriously and have already made significant progress in rectifying the matter.”

The company said that it would introduce a range of measures to ensure similar errors were not made in future. They included establishing an “oversight committee” of the board to examine stock option-based compensation; separating the roles of chairman and executive; setting up an internal audit department; and hiring an employee to specialise in securities disclosure and compliance.

RIM had previously said that the value non-cash charge associated with past options grants woukld be between $25 and 45 million.

The company’s shares were down $1.95, or 1.22 per cent, to $158.10 in morning trading yesterday.

Nearly 200 companies are being investigated by the SEC in connection with the practice of stock option backdating, including Apple. In December it said that it would take a charge of $84 million to reflect the expenses of backdated options granted to its chief executive, Steve Jobs, and others.

RIM’s report was released on the same day that Palm, the smart phone manufacturer, revealed in talks with Morgan Stanley to explore its “strategic options”.

A private buyout of Palm, whose Treo smartphones have struggled against competition from Nokia and Motorola, as well as RIM, was one possible outcome of the review, analysts said. However, the company was already tightly run, which would make finding further cost efficiencies difficult.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive