Accounting & Tax

Backlash on Stock-Option Bill

The proposed House legislation ''harms the credibility of America's system for providing transparent and unbiased financial information to investor...
Stephen TaubMay 20, 2004

Robert Denham, chairman and president of the Financial Accounting Foundation, lashed out at legislation that would greatly water down the proposed rule by the Financial Accounting Standards Board that would require companies to expense the value of stock options.

“Advancing this bill in the legislative process harms the credibility of America’s system for providing transparent and unbiased financial information to investors,” said Denham, in a statement.

H.R. 3574, the Stock Option Accounting Reform Act, was passed in the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. The bill would require the Securities and Exchange Commission to complete an economic impact study before FASB is permitted to implement its proposed rule.

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In addition, the bill would require companies to expense only stock options granted to the CEO and the next four highest-paid officers. Small businesses would be entirely exempt from FASB’s rule; newly public companies could forgo expensing for three years.

“By inserting Congress into the setting of standards for accounting by publicly traded companies, H.R. 3574 would undermine the independence of the Financial Accounting Standards Board, which Congress recently reaffirmed in the Sarbanes-Oxley Act,” insisted Denham. (The FAF is the parent nonprofit corporation that appoints members of the FASB and oversees its process.)

“An important function of the FAF Trustees,” Denham explained, “is to protect the FASB’s standard-setting process from undue interference from either the public or the private sector. Our capital markets depend on a system of continuously improving financial information about the underlying economic activities of companies, fostered by accounting standards independently and expertly developed. If Congress sends the message that special interests are able, through legislation, to overturn expert accounting judgment arrived at through open due process, necessary and timely improvements in financial reporting will likely become impossible.”

Denham asserted that the House bill preempts and overrides FASB’s effort to improve accounting for equity-based compensation through public due process. “Once Congress starts setting accounting standards through its political process, the integrity of accounting standard setting in this country will be dangerously compromised,” he added.

He also insisted if the bill is enacted, it would severely impede efforts by the FAF and FASB to achieve international convergence of high-quality accounting standards. He noted that the International Accounting Standards Board has recently issued a final standard requiring the recognition of compensation cost for the fair value of employee stock options.

“Congressional action would result in a major difference between U.S. and international standards, thus undermining the movement toward international convergence previously encouraged by Congress in the Sarbanes-Oxley Act, by the Securities and Exchange Commission, and by many investors and other market participants,” he added.