Here we go again, returning once more to stock options accounting, an issue that uncannily reminds us of the vampires in cheesy old horror movies. You know — evil incarnate that just won’t die.

In this case, the evil is imbedded in the message that options have no cost and should not appear on financial statements. Just like their celluloid counterparts, the option baddies operate from the shadows and leave havoc and destruction in their wakes.

In this case, the bite victims are the capital markets, because, if the undead prevail, the lifeblood of truth will continue to be sucked out of corporate financial reports.

It looks to us like this thing just won’t ever die!

Just for fun, we counted how many columns we have done on options and found at least five, appearing in 2003, 2002, 1999 and as far back as 1996! Despite the passage of time, a big shift by some managers toward voluntary expensing, and a huge swell of public support for reining in managers, other chief executives are creeping out of the shadows, dragging with them nothing but timeworn, self-serving and totally vacuous arguments that everyone will be better off if options expense is not on income statements. What utter nonsense!

By now, perhaps you’re wondering what we really think.

Our current indignation is triggered by burgeoning rumors that the options vampire is once again being entertained by members of the House and Senate. Having failed to dissuade the Financial Accounting Standards Board and the International Accounting Standards Board from moving forward in the normal due process, the managers’ goal is to go outside the process to use legislation to derail the American board’s efforts.

Whether it is envelopes filled with political contributions or attention-grabbing but absurd arguments that expensing options hurts corporate competitiveness or drives American jobs overseas, the vampire appears to be gaining ears and access — and winning support.

Our opinion of these swayed politicians echoes Forrest Gump’s observation that, “Stupid is as stupid does.” And we think it is unfathomably stupid for a legislator to sign on to a bill rooted in the desire to guide capital markets’ resource allocation decisions by managing the message to look good instead of managing the underlying economic reality to produce good results.

It is nothing more than an attempt to first legitimize and then institutionalize actions that are equivalent to those perpetrated by the managers of such places as Waste Management, Enron, WorldCom, HealthSouth and others, all of whom prepared fictitious financial statements. After all, weren’t they just trying to compete in the capital markets by providing financial statements that made them look better than they were?

Sure, these managers often did more than mess with options, but in concept it’s all the same game. Financial statements are either truthful, unbiased representations or they’re not. If options expense is omitted, they aren’t.

Furthermore, this move will not even work. Sophisticated financial statement users aren’t duped by reported earnings that are inflated by leaving out a real expense any more than the parents of a misguided second grader believe a report card scrawled in pencil on a page from a Big Chief tablet. No law could ever force analysts to make decisions using published earnings numbers or keep them from using other information if they wish.

In contrast to the fabricated collateral damage asserted by the opponents of expensing, real damage comes from lost confidence and credibility. Capital markets must have an unrestricted flow of accurate information to be both efficient and fair. Keeping options expense off income statements is a huge step in the wrong direction.

Yet that is exactly what many managers want. Consider this earnest statement published on the Web site for Cisco, attributed to Laura Ipsen, the company’s vice president for worldwide government affairs: “Policies to expense stock options would have a very negative effect on a company’s ability to compete internationally, and we have spent a great amount of energy on this issue in 2003 and will continue to do so in 2004.”

Clearly, the Options Vampire has taken over control of Ipsen’s brain — or the brains of those above her who have told her what to say.

Here’s how we respond: The income statement is only a picture of what happened in the reporting period, nothing more, nothing less. It is not what actually happened but only a description of what happened. And a highly incomplete one, at that, such that no investors worth their salt actually believe all that it says or doesn’t say.

Take options, for example. Cisco reported net earnings per share of $0.25 for fiscal 2002, but a footnote shows that it would have been only $0.05 if options had been recognized. Will analysts all at once start to believe that earnings were really $0.25 if Congress passes a law? More utter nonsense.

If Cisco is to compete in the global capital markets, as Ipsen suggests, it will do much better to apply that “great amount of energy” to developing internal accounting policies that produce transparent and complete reporting. Furthermore, there can be no justification for spending the stockholders’ money to keep them from learning what happened to it. This sort of blustering reveals only two things: Cisco’s managers are dunderheads, and they think everyone else is, too.

Flawed assertions
Any assertion that options are not compensation is unsupportable. Options have value and the transfer of value to anyone for services rendered is an expense — period. End of discussion.

Any assertion that reporting options expense will diminish competitiveness is an admission that they survived only by cheating. Why should that strategy be protected by law?

Any assertion that expensing options will make it hard for a company to hire employees is an open disclosure of a human resources disaster. It’s tantamount to admitting that it isn’t a very good place to work.

Any assertion that reporting an expense will end the use of options is a confession that the only reason options are used is because they are not expensed. If options are a good form of compensation, they are good regardless of the accounting.

Any assertion that the high- tech industry needs to be protected with inflated earnings is patently unsound. This position claims that it is sound public policy to trick some investors into paying too much for securities. Since when should regulators be doing that? Besides, it won’t work.

Any assertion that options cannot be valued with enough precision to be recognized is a self-indictment. First, it stipulates that there is an expense. Second, it admits that managers granting themselves options of unknown value are mighty poor stewards. Third, managers are irrational if they accept options of unknown value in exchange for their services.

So, we’ve opened the coffin in the bright light of objectivity. We have in one hand a large wooden stake of evidence. In the other is a hammer of clear thinking. We have placed the stake against the chest of this undead issue and we are now pounding it into its heart. Let this be the end of the nonsense.


Paul B.W. Miller is a professor at the University of Colorado at Colorado Springs, and Paul R. Bahnson is a professor at Boise State University. The authors’ views are not necessarily those of their institutions. Reach them at paulandpaul@qfr.biz.

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