All three financial statements are intertwined and inaccuracies in one carry over to the other. In the same way that net income is overstated, cash flow is effectively overstated. The balance sheet is another issue. When stock options are exercised by employees, a company boosts its shareholder equity account by the amount of the exercise price. While this treatment accurately reflects the transaction as it occurs, it ignores the fact that the stock is actually worth more than the option price at the time of exercise.
Many companies engage in buyback programs to limit the dilution caused by stock option programs.
These programs validate the theory that options costs are real. To see if a company is engaging in a stock repurchase to reduce shares outstanding or to offset option grants, look at the reported number of diluted shares. If the number of outstanding shares is not decreasing commensurately with the announced number of shares repurchased, repurchased shares are probably being used to offset option grants. In such a situation, it may be worthwhile to check out a company's annual report or 10-K to see the extent of its option grants. I'm not a tax expert and different stock option plans have different tax impacts.