Washington Outlook
Edited by Paula Dwyer
Expensing Options: This Time, Silicon Valley Can't Shout Down FASB
Ten years ago, Corporate America went on the warpath over stock options. Spearheaded by the high-tech industry, business pressured Congress to block a proposed accounting rule that would have depressed profits by forcing the value of stock options to be subtracted from earnings. Ultimately, the group that sets U.S. accounting rules--the Financial Accounting Standards Board--was taking so much heat from the Hill that it abandoned the effort.
Now, after two years of stock option-induced corporate scandals that undermined investor confidence and helped knock the wind out of the stock market, FASB is poised to try again. Alarmed, the high-tech lobby is mounting another all-out push to kill any accounting rule that would require expensing. Déjà vu? Yes, but now Silicon Valley is likely to meet much stiffer resistance. Corporate and political climates have changed radically since 1993, and that makes it harder "to apply the kind of political pressure that was used against FASB" a decade ago, says Dennis R. Beresford, who chaired the board during its first options fight.
Although FASB has yet to circulate even a draft proposal, tech execs are gearing up. They and leaders at companies such as Staples and Herman Miller are deluging FASB with letters arguing that since options require no cash outlays, they shouldn't be counted as a cost on the income statement. What's more, they say, existing methods of valuing options are faulty. The tech set is lining up allies on the Hill. Already, 40 lawmakers, led by California Representatives David Dreier (R) and Anna Eshoo (D), warned FASB in a Jan. 30 letter that treating options as an expense "results in the disclosure of inaccurate corporate financial information and a flawed picture of company performance."
But this time, business can't present a unified front. Coca-Cola's (KO
) decision last July to treat options as an expense set off a stampede that has resulted in more than 170 companies pledging to adopt expensing voluntarily. Congress isn't speaking with one voice, either. Senator Joseph I. Lieberman (D-Conn.), who led the charge against FASB in 1993, is on the sidelines this time. Lieberman's absence robs the hands-off-our-options crowd of a high-profile political champion.
And unlike a decade ago, a counteroffensive is starting to build. Senators Carl Levin (D-Mich.) and John McCain (R-Ariz.), longtime advocates of expensing, on Feb. 3 sent a letter, signed by 28 other lawmakers, urging FASB to follow through on its quest. The current treatment of options, says Levin, "undermines honest accounting by tempting executives to cook the books."
With Congress in business-friendly Republican hands, the techies should be notching another victory. But the stream of corporate scandals has cast a harsh light on options, undermining Hill support--and strengthening FASB's hand. In 1993, companies threatened to cut off contributions to the board if it pursued its options-expensing crusade. Now the Sarbanes-Oxley Act of 2002 frees FASB from such worries by assessing mandatory fees on public companies. For now, the board's funding, which the SEC must approve before the money flows, is hung up in a power play as outgoing SEC Chairman Harvey L. Pitt tries to assert new authority over the board. With Pitt's departure, FASB should soon have the SEC's approval to start levying fees.
Even if FASB endorses expensing, a move that is expected by the end of March, questions over how to value options could delay any rulemaking for months. Still, the battle lines have shifted since FASB's initial try. Silicon Valley may want to fight the last war, but unless it absorbs the lessons of the past two years, it's going to find itself outmaneuvered.
By Amy Borrus
CAPITAL WRAPUP
Pitt's Last Licks
Harvey L. Pitt may be down to his final days at the SEC, but he's still trying to throw his weight around. Pitt wants greater SEC control over the Financial Accounting Standards Board, the independent body that writes corporate accounting rules. But all he's achieving is a financial crunch.
During a yearlong battle, Pitt has insisted upon an SEC seat on the seven-member board, a veto over FASB membership, and control of its agenda, say SEC and accounting sources. He has softened those demands but still wants more SEC oversight than ever. Pitt's spokeswoman declined to comment.
The power grab would reverse what had been a trend toward greater FASB independence. In last year's Sarbanes-Oxley corporate reform act, Congress gave FASB official status and an independent funding stream through levies on publicly traded companies.
But FASB can't collect those fees until the SEC approves FASB's budget, and that gives Pitt leverage. The two sides were near agreement in January, but Pitt grew angry when FASB contacted other SEC commissioners, rather than dealing solely with him, accounting sources say. He then ordered his staff to draw up the policy statement for the five-member SEC to approve.
Pitt's crusade has little support at the SEC. And the Senate is on the verge of confirming William H. Donaldson as chairman, ending Pitt's lame-duck reign. But the standoff is forcing FASB to run down its reserve funds. "You're looking at early summer before [FASB] can get its revenue stream going," says an accounting source.
By Mike McNamee
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Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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