Expensing Options Revisited

by | Jan 30, 2004 | POLITICS

Paul Atkins this month became the first SEC commissioner to criticize openly a proposal to require companies to treat employee stock options as current expenses. Atkins began by questioning whether the Financial Accounting Standards Board, which has aggressively pushed the change, is truly seeking to address a serious accounting problem. “Is there a significant investor […]

Paul Atkins this month became the first SEC commissioner to criticize openly a proposal to require companies to treat employee stock options as current expenses. Atkins began by questioning whether the Financial Accounting Standards Board, which has aggressively pushed the change, is truly seeking to address a serious accounting problem.

“Is there a significant investor outrage or concern out there about this issue? Are there cadres of investors who are clamoring that they don’t understand the footnotes disclosure regarding the effect of options on a company? And is there a fear that the current disclosure method provides unclear or unreliable information about the dilutive nature of options?”

Without saying so explicitly, Atkins clearly implied that the answer to these questions was almost certainly “no.”

He later said, “Much of my comments here require a look back at the original threshold question. That is, what is the problem that people are trying to solve? And does the FASB direction fix the problem? I’m not sure that the presented fix doesn’t create more problems.”

Atkins’s remarks came at a conference at the American Enterprise Institute, where two economic papers were delivered attacking the proposal, now under consideration by the Financial Accounting Standards Board (FASB).

Atkins used strong language to express his fears that FASB’s intentions were not strictly related to its mandate of improving accounting standards. Instead, he said he worried that “FASB is basically getting into an area that’s more of a political issue.” The commissioner stopped short of opposing the FASB proposal, but he sent a clear message that he had deep concerns about it.

The theme of the conference was summed up in the first of the papers, which concluded that “the establishment of new accounting rules for expensing options would likely do more harm than good.” That paper was authored by Charles Calomiris, Henry Kaufman Professor of Financial Institutions at Columbia University, and Glenn Hubbard, another Columbia economist who, until last year, served as chairman of President Bush’s Council of Economic Advisors.

Calomiris, in fact, said he saw no benefits at all from the FASB proposal, but many dangers, including the strong possibility that investors would be misled about the value of options. In commenting on the paper, Deen Kemsley, a Columbia accounting professor, said that the new FASB rules would make it easier for unscrupulous corporate executives to manipulate financial statements.

The other paper — by Kevin Hassett, director of economic policy studies at AEI, and Peter Wallison, an AEI fellow who formerly served as general counsel to the Treasury Department –raised serious concerns about the proposal — both economic and legal.

All the economists who spoke at the conference agreed that the current system for options accounting, which allows discussion in footnotes as an alternative to immediate expensing, provides investors with the information they need to make informed decisions.

But the comments of Atkins drew the most attention. Speaking only for himself and not for the commission, which holds sway over FASB but does not write accounting rules, Atkins said, “My own fear about where this is going is that FASB is basically getting into an area that’s more of a political issue than a technical or accounting issue. My fear is that the pressure on this issue is meant to address a corporate governance failure on the part of the board than to rein executive compensation.”

He continued, “One thing that I am certain of

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James Bovard is the author of ten books, including Public Policy Hooligan, Attention Deficit Democracy, The Bush Betrayal, and Lost Rights: The Destruction of American Liberty. He has written for the New York Times, Wall Street Journal, Playboy, Washington Post, New Republic, Reader’s Digest, and many other publications. He is a member of the USA Today Board of Contributors, a frequent contributor to The Hill, and a contributing editor for American

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