Senator Fitzgerald Questions House Bill to Overturn Stock Option Expensing

U.S. Senator Peter G. Fitzgerald (R-IL) today criticized legislation approved by a House committee that would undermine a Financial Accounting Standards Board (FASB) proposal requiring companies to expense employee stock compensation.

According to Fitzgerald, the measure, passed out of the House Financial Services Committee, sends conflicting messages to the investing public, including a provision requiring companies to expense stock option compensation for certain employees and not others.

Specifically, Fitzgerald noted that opponents of FASB's proposal have argued that the cost of stock options can't be properly valued and that stock options are not a true cost. However, Fitzgerald said that by requiring companies to expense stock option compensation of their top five executives, the House bill, which FASB opponents are pushing, contradicts both assertions.

"Requiring companies to expense the stock option compensation of their top five executives is a plain and clear admission that stock options are a cost and can in fact be calculated," said Fitzgerald. "And if stock options are a cost that can be adequately calculated, then, in the interest of honest and transparent accounting, shouldn't all stock option compensation be treated as an expense?"

"FASB's proposal to expense stock options for all employees is the only logically consistent policy," the senator continued. "Stock option compensation is an expense and, therefore, should be treated as an expense across the board. No exceptions."

Even if companies are required to report the stock option compensation of its top executives, Fitzgerald noted that two provisions in the House bill would severely undermine its limited expensing requirement. First, the senator explained that the bill requires companies to assume zero volatility of an underlying stock when figuring the cost of executive stock option compensation. Since all stocks are volatile, meaning their prices constantly move up and down, assuming zero volatility essentially renders meaningless any value assigned to these stocks for expensing purposes.

Moreover, mandating zero volatility could enable companies to manipulate other price-determining variables in such a way that executive stock options may result in zero expense on a corporate income statement.

According to Fitzgerald, this provision amounts to a "wink and a nod" from Congress to corporations that want to avoid reporting any stock option compensation as an expense on their earnings report.

Additionally, a separate provision in the bill would exempt for three years newly public companies from any expensing requirement - regardless of how much stock options cost a particular company. Though such a provision is supposed to ease the financial burden on small businesses, Fitzgerald explained that it would automatically exempt mammoth companies, like Google, which plans to raise billions of dollars in its upcoming public offering, from reporting any stock option compensation as an expense. Google reported revenues of $962 million in 2003.

Fitzgerald also expressed concern regarding a provision that would explicitly violate the long-standing principle that accounting standards are to maintain neutrality with respect to their potential effects on business. That provision would prevent the Securities and Exchange Commission (SEC) from recognizing any stock option accounting rule unless, among other things, an economic impact study is completed to determine possible adverse effects the rule might have on businesses.

Commenting on the provision, Fitzgerald stated, "Accounting standards are supposed to accurately reflect a company's true financial condition, not to shield business from any adverse effects that come with open and transparent accounting."

Since FASB proposed its new rule requiring companies to expense stock option compensation, Fitzgerald has pledged to do everything possible to block the bill in the Senate and to protect FASB's independence.

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