Plain Wrong

15 October 2004


Tech Industry Wins Delay on FASB Rule Requiring Expensing of Options

The Financial Accounting Standards Boards backtracked on its plan to have public companies count their employees’ stock options as expenses. Because of the complaining from America’s high tech industry (which has a tradition of paying people too little in cash and too much in stock that may or may not be worth millions), FASB has put off this requirement for six months. Ostensibly, this is to give everyone more time to get their ducks in a row. In real terms, though, it gets everyone with a vested interest in killing this off through to the other side of the election. Then, the backroom influence peddling can begin.

As an issue of corporate transparency, there is absolutely no reason not to make this change. Employee options have value. They are wealth. Their exercise creates or transfers stock, which affects other investors, both debt and equity. To pretend, as current rules to, that options are cost-free is prima facie untrue. The current situation distorts the company’s accounts terribly.

That said, any change to accounting standards makes it awkward to compare a company’s previous financial results with future revenues and earnings. Making such a fundamental alteration to the rules by which American companies have played will cause much midnight oil to burn in the accounting department. It is also a challenge to the communications and investor relations departments to communicate the effect of the rule change to shareholders. An additional six months to set the stage may well be appropriate.

Yet that doesn’t explain why the House of Representatives has passed a bill to block the rule, and a majority of sitting US Senators has asked the SEC to for FASB to reconsider its position. Only the efforts of Senator Richard Shelby (R-AL), the chairman of the Senate Banking Committee, have kept the Senate from voting on this bad idea. Meanwhile, William Donaldson, head of the SEC, is resisting the pressure on FASB.

This is a classic case of minority rule, which is how Washington often works. The benefits to transparency are widespread and largely unrecognizable by the casual observer. However, those who currently benefit from opacity will have to pay a high price, and they squeal loud enough for legislators to notice. And so the minority interest prevails. In this case, the entire investment community is going to pay for the hidden costs tech firms have built into their own balance sheets, unless Senator Shelby, Chairman Donaldson and like-minded people stand their ground for another six months.

© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.

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