With enough political support for the bill, Eshoo predicts that the head of the SEC would find it difficult not to go along. "Certainly, chairman Levitt did," she observes. Levitt himself thinks Donaldson will stick to his guns. "We have an SEC chairman that is solidly behind the expensing proposal," he says.
To be sure, Donaldson also said publicly that he plans to visit with executives in California who oppose expensing options. "I am willing to listen," he said in May. But he told them not to get their hopes up. "As far as I'm concerned," he warned, "we have crossed the Rubicon."
Perhaps. Congressional support for the bill is by no means overwhelming at this point. But Beresford fears that Sarbanes-Oxley has inadvertently made FASB more vulnerable to political pressure. Previously, about a third of FASB's annual budget came from voluntary contributions from public accounting firms, the AICPA, and some 1,000 individual corporations.
Under Sarbanes-Oxley, those voluntary contributions are replaced by mandatory fees from all publicly owned corporations based on their individual market capital-ization. But the fees are to be collected by the newly formed Public Company Accounting Oversight Board. And the SEC oversees the PCAOB.
While Beresford believes the new setup gives FASB more independence from the business community, he says, "it's not clear that it has more independence from the political process. In fact, it may have less [independence] from Congress and other people in Washington." Under the new arrangement, it's a pretty simple matter for the SEC to pressure FASB. "The SEC could give them a hard time with their budget," notes Beresford, "and just not get around to collecting the money they made."
In other words, how FASB votes on options expensing may depend on how William Donaldson handles the board's paychecks.
FASB's Surgeons
On its own terms, the legislation now before Congress poses less of a threat to FASB's independence than a bill introduced a decade ago.
In 1993, legislation introduced by Sen. Joe Lieberman (D-Conn.) would have not only nullified the effect of the proposed FASB standard on stock options but also effectively put the board out of business, notes then-FASB chairman Dennis Beresford.
The bill, which garnered broad support, required the Securities and Exchange Commission to redo the whole standard-setting process. Faced with its likely passage and virtually no support for its project by executives, the accounting industry, or the SEC, FASB backed away from expensing, instead requiring disclosure of the cost of options only in the footnotes of financial statements.
The Senate ultimately voted 88 to 9 for a nonbinding resolution that urged FASB not to expense stock options. "It was basically a warning shot," says Beresford, "but the bigger concern was the actual legislation proposed by Lieberman."
"The difference now is that they're dealing only with the stock-options issue," Beresford says of the bill introduced in March by Rep. David Dreier (R-Calif.) and co-sponsored by Rep. Anna G. Eshoo (D-Calif.). "It's more of a surgical strike."
Since a House subcommittee hearing on the bill in June, 13 representatives have joined as co-sponsors, for a total of 53 bipartisan supporters. That represents more than 12 percent of the total 435 House representatives. A companion bill, S. 979, introduced in the Senate in May by John Ensign (R-Nev.) and co-sponsored by Barbara Boxer (D-Calif.), faces a more uncertain future despite having a higher level (19 percent) of bipartisan support. Senate Banking Committee chairman Richard Shelby (R-Ala.) recently said he would deny that bill a hearing in the Senate, believing as he does that lawmakers shouldn't be interfering in FASB's affairs.
But as the outcome of Congress's last battle with FASB over stock options suggests, legislation needn't be enacted to have the desired effect. —C.S.
D.C. Versus the Board
Stock options haven't been the only source of friction between the Financial Accounting Standards Board and its federal overseers. To be sure, the Securities and Exchange Commission has only officially overridden FASB once since the board's inception in 1973. That decision came a few years later, as FASB was writing rules for oil and gas exploration and development costs.
Congress, for its part, has taken an interest in several other FASB projects over the years, including accounting for derivatives and the business combinations and goodwill project. The latter issue, which ultimately eliminated pooling of interests accounting, spawned legislation and arguments that are strikingly similar to those stemming from today's options-expensing debate.
During hearings on the proposed elimination of pooling, for instance, Cisco Systems Inc. CFO Dennis Powell, then corporate controller, warned during a Senate hearing that the proposal "will certainly stifle technology development, impede capital formation, and slow job creation in this country." He further argued that a switch to the purchase model would lead companies with a higher percentage of acquired intangible assets "to report an arbitrary, artificial net-income number that is irrelevant and misleading."
Of course, that view assumes that investors' perceptions are more important to economic growth than business fundamentals, and the bursting of the Internet bubble has thrown cold water on such thinking, at least for the time being. But that hasn't prevented industry lobbyists from rehearsing the argument in the latest battle with FASB.
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