WASHINGTON – Following a House vote to override a rule that would force companies to count stock options (search) against their profits, a key senator is promising to block a similar move in that chamber.
The House vote Tuesday was 312-111, with 198 Republicans and 114 Democrats approving the bill that would block a proposal by the Financial Accounting Standards Board (search). The board is seeking to force publicly traded companies to record all forms of share-based payments to employees, including stock options, as expenses.
The rule change proposed by the board in March could dramatically reduce the reported earnings of many big companies, particularly in the high-tech industry, where stock options for employees have been popular.
Federal Reserve Chairman Alan Greenspan, a proponent of mandatory expensing and FASB's proposal, told senators at a Banking Committee hearing Tuesday, "I would be most concerned if Congress intervened." Of the rule-setting board, he said: "I think they do a good job. It's a tough job."
The committee's chairman, Sen. Richard Shelby (search), R-Ala., agreed with Greenspan. He derided the House action as "political interference" in the work of independent accounting experts. "I will continue to fight any effort to pass similar legislation in the Senate," he said.
To buttress FASB, four senators brought forward a resolution reaffirming the board's independence and urging the Senate not to intervene in its rule-setting process. The four, all prominent advocates for mandatory expensing of options, were Republicans Peter Fitzgerald of Illinois and John McCain of Arizona, and Democrats Carl Levin of Michigan and Richard Durbin of Illinois.
The House-passed measure, sponsored by Reps. Richard Baker, R-La., and Anna Eshoo, D-Calif., would limit required expensing of options to those owned by a corporation's top five executives. It also would allow newly public companies to delay expensing for top executives in the first three years.
Advocates of mandatory expensing also include Securities and Exchange Commission Chairman William Donaldson, billionaire investor Warren Buffett and the Big Four accounting firms.
Some blame stock options for fueling recent corporate abuses. They say options entice executives to manipulate earnings to pump up stock prices and then sell their lucrative personal holdings. Still, options remain a popular compensation tool to help motivate employees, who can buy shares at a fixed price and sell at a profit if the company's stock rises.
In House debate, supporters of the legislation insisted that a mandate to count options against the bottom line would complicate income statements, discourage startup companies and hurt the economy by stifling future innovation. They also said it was impossible to determine the value of options.
The FASB proposal answered the call for accurate financial statements that came after a string of corporate scandals, starting with Enron.
But supporters of the bill maintained Tuesday that the rule would unfairly punish an estimated 14 million rank-and-file employees for the abuses of a few top executives who manipulated earnings.
Companies now need not record the cost of options as an expense on their financial statements, though hundreds have begun to do so voluntarily. Instead, they must only include the potential cost in a footnote, making it difficult for investors to gauge their impact on earnings.
Fighting mandatory expensing are members of a lobbying coalition that includes Agilent Technologies, Cisco Systems, Coors Brewing, Dell, General Mills, Intel and Sun Microsystems. Also opposed are the Nasdaq Stock Market, home to numerous big high-tech companies; the National Association of Manufacturers; the U.S. Chamber of Commerce, and the Business Roundtable, which represents chief executives of the largest U.S. corporations.
If the FASB proposal is approved, it would take effect Dec. 15.
FASB Chairman Robert Herz said last month the panel may delay a final rule because corporate America already is facing deadlines to implement other new regulations enacted in 2002 in response to the scandals. Donald Nicolaisen, the SEC's chief accountant, has said FASB should consider delaying the rule to 2006.