VideoManagement at the Coca-Cola Co. dropped a minor bombshell Sunday when it announced it will expense the cost of all stock options the company grants. The revised accounting treatment will begin with options to be granted in the fourth quarter of the year.
"Management has concluded that stock options are a form of employee compensation expense and therefore it is appropriate that these costs be reflected in our financial results. I am pleased that our company's Board of Directors agrees," said Doug Daft, chairman and chief executive officer. "Our management's determination to change to the preferred method of accounting for employee stock options ensures that our earnings will more clearly reflect economic reality when all compensation costs are recorded in the financial statements."
Expensing options has become one of the lightening rods in the debate over corporate accounting reform. Many critics of President Bush's get-tough speech on July 9 regarding accounting abuses said they were disappointed that the president did not call for the expensing of stock options.
How contentious is the issue of stock option accounting? Indeed, Sen. Carl Levin (D.-Mich.)recently proposed an amendment to the current Senate bill that would create an accounting industry oversight board. Levin's amendment would simply instruct that board, if established, to examine the issue of how company's account for corporate stock options. The amendment does not mandate that corporations treat stock options as expenses. Nonetheless, Levin's amendment has drawn considerable criticism -- particularly from companies in Silicon Valley -- and may not pass.
Hence, it was surprising to see one of the world's largest companies voluntarily choose to take the lead by adopting an options-as-expense policy. Clearly, Coke's move puts pressure on senior executives at virtually every other company to justify why they don't do the same.
"We think the time is right for corporate America to show leadership and integrity in their financials," Coca-Cola Chief Financial Officer Gary Fayard told Reuters. He called the current method of not expensing options as a "loophole."
Coke director Warren Buffett agreed, telling Reuters he thought the company's decision was a "classy move." Buffett added: "It provides numbers in terms of earnings to the shareholders that far more accurately reflect economic reality than the prevailing system in corporate America. It tells the truth to shareholders about what compensation really costs."
Coca-Cola will adopt the fair value based method of recording stock options contained in SFAS No. 123, Accounting for Stock-Based Compensation, which the company management said is considered the preferable accounting method for stock-based employee compensation.
All future employee stock option grants will be expensed over the stock option vesting period based on the fair value at the date the options are granted. "The company expects minimal financial impact in the current year from the adoption of this accounting methodology," it added in a statement.
Coke management estimated if its board of directors grants options in 2002 at a similar level to 2001, the expected impact would be approximately a penny per share for 2002.
Coke said it intends to use quotations from independent financial institutions to determine the fair value of the stock options granted. The option value to be expensed will be based on the average of the quotations received from the financial institutions to buy or sell Coca-Cola shares under the identical terms of the stock options granted.
Now, we'll see if other companies follow Coke's lead.
Report: WorldCom's Problems Started Earlier
Louisiana Republican Rep. Billy Tauzin, chairman of the House Energy and Commerce Committee, said Sunday on ABC's "This Week" that WorldCom's accounting problems actually date back to 2000, one year earlier than the company has admitted to.
Tauzin said that internal documents show that then-CFO Scott Sullivan and several other executives tried to quash complaints from at least two employees about the company's accounting methods. Tauzin says those complaints came as early as April 2000. "The documents ... reveal a strange pattern of people inside the corporation discovering it, trying to do something about it, and ultimately failing until recently," said Tauzin.
According to documents released by Congress, several members of the WorldCom staff, including a member of the company's internal audit staff, reportedly challenged several of CFO Scott Sullivan's accounting practices.
Today's Accounting Scandals
Pretty soon, you'll need a program to keep track of all the bookkeeping scandals -- and bookkeeping scandal rumors -- out there.
Over the weekend, for example:
- Shares of Procter & Gamble Co. closed down about 2.7 percent on Friday due to rumors that the consumer products giant had an accounting problem. "This is strictly a rumor with absolutely no foundation," Clayton Daley, P&G's chief financial officer, said. "We have not been contacted by any authorities whatsoever regarding our accounting practices. In fact, we have been recognized for the clarity of our financial statements by individuals in both the investment and academic communities."
- Duke Energy Corp. and El Paso Corp. Friday reported they received subpoenas for documents from the U.S. Attorney's Office in Houston, as part of a grand jury investigation. Duke said it also received a subpoena from the Commodity Futures Trading Commission.
These probes are part of the same investigation of trading practices of energy companies that have led prosecutors to seek trading records from Dynegy Inc., Reliant Energy Inc. and CMS Energy Corp.
As we reported back in June, Duke and El Paso said the SEC had requested information about deals associated with the controversial "round trip" practice. Also called "wash trades," these deals involve buying and selling power or natural gas at the same price with the same counterparty.
Duke management said these transactions contributed about $1 billion to the company's revenues over three years, less than 1 percent of trading revenues. In a statement Friday, Duke said it is fully cooperating with these investigations, as it has with other government organizations inquiring into the same issues.
- Qwest Communications International Inc.'s new chairman and chief executive Richard Notebaert is said to be mulling restating the company's 2001 financial results. The restatement would wipe out more than $1 billion in revenue, according to The Wall Street Journal, citing people familiar with the matter.
- Circuit City Stores Inc. admitted an SEC review was responsible for the company's decision earlier this month to postpone the spinoff of its CarMax Group auto-retail business, according to The Journal. However, the company insisted the delay was not due to serious questions about its accounting.
The SEC is conducting a "normal review," Dandy Barrett, CarMax's director of investor relations, told the paper. "It's just taking a little longer than we expected."
Ranking M&A Law Firms
It's no secret this is tough time to pull off a merger or acquisitions. In fact, worldwide deals plunged 35 percent (to $528 billion) in the first half of this year, according to Bloomberg.
No surprise, then, that the law firms advising deals saw their business slump as well.
Against this bleak backdrop, which law firms were able to scare up the most business?
Three of the top four law firms were London-based. European giant Linklaters, itself a beneficiary of mergers, worked on 90 announced acquisitions worth $83.2 billion during the first six months, including five of the six largest acquisitions this year.
New York City-based Skadden, Arps, Slate, Meagher & Flom LLP, finished third, advising on 69 deals valued at $46.2 billion. For example, it is advising TRW Inc. on its sale to Northrop Grumman Corp. for $12.9 billion, the second largest deal so far this year.
New York City-based Wachtell, Lipton, Rosen & Katz, last year's top M&A advisory firm, finished fifth.
Here are the top 10 merger law firms for the first half of 2002 and the deal value in billions of dollars:
Linklaters $83.3
Freshfields $46.8 6
Skadden, Arps $46.3
Allen & Overy $33.5
Wachtell, Lipton $32
Shearman & Sterling $32
Ashurst Morris $26.3
Clifford Chance $25.8
Weil, Gotshal $23.3
CMS Cameron McKenna $23.1
Insurance CFOs Plan Changes
More than half of CFOs working at life insurance companies are planning changes to internal business practices, such as their approach to risk management and financial reporting, according to a recent Tillinghast-Towers Perrin survey.
About 40 percent of life insurance company CFOs reported having experienced greater scrutiny of their financial reporting practices, risk management practices and investment portfolios, and a change in their relationship with their audit firms, according to the survey.
And, 56 percent of respondents plan changes to internal business practices and 37 percent have changed or are planning to change their use of audit firm services.
Of the companies considering changing their use of audit firm services, 82 percent have already discontinued or scaled back the use of their audit firm for non-audit consulting services.
"The survey demonstrates that companies acknowledge the urgent need for improved disclosures externally as well as changes to key internal business practices," notes Jack Gibson, the life insurance and financial services sector leader for Tillinghast-Towers Perrin in North America. "Yet there are substantial differences in the manner in which companies are making changes. Ultimately, wise company managers will pay close attention to the needs of the investment community and rating agencies."
(Editor's note: To see which industry sectors are the toughest on CFOs, read "Tough Jobs, 2002, a CFO.com exclusive.)
Short Takes
- Credit Suisse First Boston USA Inc. Friday issued $1 billion of 30-year bonds. The long-term notes were priced to yield 7.204 percent, or 185 basis points over comparable Treasurys, and were rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's.
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