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Pitt on Options: Let Owners Decide

Pitt says shareholders should be allowed to weigh in on options issue; seen as reversal in policy. Also: Qwest to restate, Liposcience to wait, Peregrine to agitate. Plus: Are companies transparent to investors?
Stephen Taub, CFO.com | US
September 23, 2002

As members of the Financial Accounting Standards Board, the International Accounting Standards Board, and the U.S. Congress mull the accounting treatment for employee stock options, Securities and Exchange Commission chairman Harvey Pitt said the ultimate decision on the topic should be made by another constituency.

In an interview with Bloomberg, Pitt said shareholders should be given the opportunity to vote on whether companies treat stock options as an expense.

Expensing options "is a topic of major concern to people, and I think shareholders should have the chance to express their views on it," Pitt told the wire service.

Pitt's statement appears to mark a reversal in policy at the SEC. Until now, the commission has allowed companies to reject proxy proposals to expense options, saying the issue falls under "ordinary" business exempt from shareholder votes.

In fact, during the past year alone the SEC has permitted seven companies to exclude shareholder proposals on this issue, according to Bloomberg.

In July, for example, the SEC permitted National Semiconductor Corp. to toss out a proxy on the options topic. It even issued the company a "no-action letter," which means the SEC won't take enforcement action if a company does what the agency is permitting.

Other companies that received no-action letters from the SEC on the options-expense issue include Meredith Corp., MIPS Technologies Inc., and Sysco Corp., according to Bloomberg.

The accounting treatment for options has become a hot topic of late. Since July 1, more than 95 U.S. companies, including Coca-Cola, General Electric, and the Washington Post, have announced that they will begin expensing options. In addition, FASB is now revisiting the issue of whether companies should be required to treat stock expenses as expenses. And as CFO.com reported, a 12-person task force of The Conference Board last week recommended that corporates expense worker options.

Pitt's comments might bring the issue to a head, spurring investors to action. Labor unions, which are big investors in U.S. businesses, have been actively seeking to get publicly traded companies to expense options.

The United Brotherhood of Carpenters, for example, is currently appealing the National Semiconductor decision. Ed Durkin, director of that union's corporate affairs, told the wire service he believes the change in the SEC's position will lead to "hundreds" of proxy requests to switch option accounting.

This means there could be a slew of proposals for next year's round of annual meetings. Since many companies conduct their annual meetings in the spring, the deadline for submitting the proxies won't come for another two months.

It appears many technology companies will resist the call to expense employee stock options, however. Notably, executives at Cisco Systems and Intel Corp. have voiced opposition to the expensing of options.

In fact, Intel CEO Andrew Grove, along with former Federal Reserve Bank head Paul Volcker, were the two members of The Conference Board task force who disagreed with that group's recommendation. "The issue of accounting treatment of stock options has become an economic Rorschach test onto which people project their basic beliefs about American enterprise," argued Grove. "Unfortunately, this does not encourage a rational discussion of accounting issues."

Qwest Announces Another Restatement
Another day, another restatement by a telecommunications company.

On Sunday night, management at Qwest Communications International, which is already being investigated by regulators and Congress, indicated it will reverse $950 million in revenues and related costs related to exchanges of optical capacity assets previously recognized.

The restatement covers 2000 and 2001 financial statements.

Qwest's management also said about $531 million in revenue previously recognized from sales of optical capacity assets for cash may also require adjustment. The magnitude of the adjustments and the periods affected have not yet been determined, according to the company.

"The company historically accounted for contemporaneous exchanges of optical capacity assets based on accounting policies approved by its previous auditor Arthur Andersen LLP," noted Qwest management. "After analyzing its prior policies and practices, including the underlying accounting records, and in consultation with its new auditors, KPMG LLP, the company has concluded its policies and practices do not support the accounting treatment to allow for recognition of revenue from these exchange transactions."

Back in July, the company reported it would restate results after misstating $1.16 billion in sales.

The U.S. House Energy and Commerce Committee plans to hold hearings during the next two weeks or so on agreements to swap network capacity involving Qwest, Global Crossing, Flag Telecom, and Cable & Wireless, according to published reports.

Peregrine to Sue Andersen
Management at software maker Peregrine Systems Inc., which on Sunday filed for bankruptcy protection, said it plans to file a $1 billion suit against its former auditor (Andersen LLP) and related parties. Apparently Peregrine management blames the auditor for not detecting the problems that led to the company's bankruptcy.


Specifically, the company said the suit would be filed against Arthur Andersen LLP, Arthur Andersen Germany, Arthur Andersen Worldwide SC, Daniel Stulac (the audit partner on the account), and other defendants to be named later. Peregrine is seeking damages in excess of $250 million for each of the four causes of action in the complaint.

The lawsuit alleges that the defendants were negligent, engaged in fraud, and breached their audit and accounting duties and responsibilities.

Commenting on the lawsuit, Gary Greenfield, Peregrine's CEO, stated: "The board trusted our former independent auditors, Arthur Andersen, and they failed to live up [to] the responsibilities required in that relationship."

There's been little good news coming from Peregrine in the past six months or so. In May, the company announced it had discovered problems with the way it recognized some revenue. Since then, it has engaged in a war of words with auditor KPMG (which Peregrine hired to replace Andersen, then subsequently fired), has accepted the resignation of its CFO, and has admitted that the SEC is investigating its accounting practices.

Show Me the Financials
More than half of senior executives at U.S. and European multinational companies believe their company should improve its level of transparency to investors and other stakeholders, according to the most recent PricewaterhouseCoopers Management Barometer survey.

Although 80 percent of the respondents said their company now provides a high level of disclosure, about 40 percent say they would personally expect more information from their company if they were an outside investor.

"In the wake of corporate reporting scandals, better than 90 percent of top executives on both sides of the Atlantic now clearly recognize the importance of transparency for their company," said Robert Eccles, PwC senior fellow and co-author of the new book Building Public Trust: The Future of Corporate Reporting. "Likewise, they understand that the lack of transparency can lead to negative consequences for the capital markets ranging from a loss of investor confidence to weak economic growth."

Among the effects of a lack of transparency:

Interestingly, more than half (52 percent) of U.S. executives and 35 percent of European executives in the survey regard their companies as "extremely transparent" to independent directors. Another 25 percent of U.S. executives who responded believe their companies are "very transparent." More than half of the European executives in the survey believer their companies are very transparent.

"While most executives think their company does a good job in providing information to stakeholders, it's noteworthy that so many of them admit they would expect a greater level of transparency if they were private investors," said Eccles. "I anticipate that realization will add impetus to the movement for greater transparency in corporate reporting."

Four types of disclosure are most often cited as needing improved transparency in one's own company: nonfinancial value drivers, such as customer service and success in new product development; corporate and business-unit strategies; results compared with a benchmark group of competitors; and forward-looking information, such as plans and targets.

"In this time of discredited corporate reporting, providing more information, particularly about nonfinancial value drivers, is gaining credence," said Eccles. "Executives realize there is significant potential in increased transparency."

Short Takes:
So much for the Liposcience Inc. initial public offering jump-starting the IPO market. The medical technology company late last week delayed its $75 million initial public stock offering planned for Thursday. The company now plans to sell its shares on Monday, according to published reports. Liposcience is planning to sell 5 million shares at $14 to $16 a pop. Just one IPO has been successful in the past eight weeks.

>> U.S. junk bond mutual funds pulled in more cash than was redeemed for the fourth straight week, adding a net $153.3 million, according to AMG Data Services. Altogether, the junk funds have scooped up $2.183 billion during the past four weeks.




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