by Glenn Cheney
Don’t tread on the Financial Accounting Standards Board — that’s the message from the Big Four to Congress.
In a letter to U.S. Representative Richard H. Baker, R-La., and Rep. Paul Kanjorski, D-Pa., both of the Subcommittee on Capital Markets, the top officers of the major accounting firms made it clear that they do not want Congress meddling with accounting standards or compromising the independence of FASB.
The letter came as the subcommittee works on a bill, co-sponsored by Baker and Rep. Anna Eshoo, D-Calif., that would allow companies to expense only some of their employee stock option compensation at fair value on balance sheets. Currently, companies have the option of expensing such compensation or only disclosing its effect in footnotes.
FASB, however, has proposed changing that to make the expensing of all stock option compensation mandatory, bringing the U.S. standard closer to international standards.
FASB chairman Robert Herz declined to comment on the letter, but spokesperson Sheryl Thompson expressed the opinion of the board.
“FASB very much appreciates the support expressed in the letter and the fact that constituents take an active interest in the board’s work,” Thompson said. “We think that’s a very positive development. Like Congress, we serve the public, and our role is to improve financial accounting and reporting, and that’s what we are focused on.”
As Rep. Baker worked on his bill and the big firms worked on their letter, FASB was hammering out the final details of a proposed statement. It requires the expensing of stock option compensation at a fair value determined by the formula that a given company believes to be more appropriate. The most common models would be the Black-Scholes and the more detailed binomial.
The letter made it clear that a reliable standard is important, but that the overriding issue is the independence of private-sector standard-setting. “We urge Congress to preserve the independence of [FASB] and to avoid legislation that would have the effect of restricting FASB’s ability to establish accounting standards,” the letter stated. “We reaffirm our support ... for the mandatory expensing of all employee stock options, whose fair value would be determined in a manner suitable for the reporting company.”
The letter was signed by Dennis M. Nally, chairman and senior partner of PricewaterhouseCoopers; Eugene O’Kelly, chairman and chief executive officer of KPMG; James H. Quigley, chief executive of Deloitte & Touche; and James S. Turley, global chairman and chief executive of Ernst & Young.
With a nod of concern to the corporate sector that is resisting change to the current standard, the letter asked FASB to “continue to address concerns that exist regarding the reliability of the valuation models used to determine the fair value of stock options.”
The Big Four’s defense of private-sector standard-setting is a departure from a similar situation in 1994.
Then, in a struggle between FASB — which was proposing an options expense standard — and an organization of high-tech companies that resisted the idea, the Senate was induced to pass a non-binding resolution asking FASB to drop the project. The big accounting firms stood by, reluctant to take a position. FASB eventually backed down, producing a standard that allows companies to decide whether to expense the value on balance sheets, or merely disclose the hypothetical effect on balance sheets.
The Hill’s version
The Baker-Eshoo Stock Option Accounting Reform Act, if enacted, would require the expensing of the stock option compensation only of a company’s chief executive officer and the next four most highly compensated officers. It would prohibit the Securities and Exchange Commission from recognizing any accounting standard that does not meet criteria specified in the bill.
“Broad-based employee stock options are a powerful tool for attracting and retaining talented, entrepreneurial employees,” Rep. Eshoo said. “At the top 100 technology companies, 80 percent of the stock options granted went to rank-and-file workers; they’ll be the ones who lose out if these options are arbitrarily expensed. This legislation increases transparency while helping ensure that our economy’s most innovative companies can continue to create and grow.”
Baker spokesman Michael DiResto said that the bill is an effort to require good accounting without negatively impacting economic growth.
“Mr. Baker believes this is a very important bill and that it strikes a good balance in getting sound corporate governance while not leveling unintended consequences on the economy,” DiResto said. “Stock options are extremely important. They help risk-taking companies and risk-taking employees contribute greatly to their industries and the economy.”
Co-sponsor Eshoo agreed that the general expensing of stock option compensation for all employees will suppress a significant catalyst of corporate growth.
Resistance to FASB’s proposed standard is being led by the International Employee Stock Compensation Coalition, an ad hoc association of over 50 companies and other interested organizations. Jeffrey Peck, lead consultant with the Washington lobbying firm Griffin, Johnson, Madigan & Peck, represents the coalition.
“The key paragraph in the letter is the one about valuation,” Peck said. “It is consistent with, though less specific than, what the firms have said in the past on valuation. It will be interesting to see what the firms do after seeing and testing FASB’s exposure draft.”
Peck cited several instances in which the major accounting firms have expressed reservations about the accuracy and comparability of various valuation models.
Peck said that Baker’s bill has some 80 co-sponsors from both parties, and that a Senate bill with similar provisions has some 17 co-sponsors.
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