Options Expensing Ripe for Abuse

Representatives for those companies did not respond to inquiries about the assumptions they used in calculating their options.

Companies that lower their assumptions on volatility or options shelf life could honestly believe that those values are going down, Ciesielski said. But they could also be trying to illegitimately minimize their options costs.

"Stock option compensation has been controversial because firms don't like to disclose compensation," Ciesielski wrote. "It's only right to view assertions about the compensation with a large dose of skepticism."

Watching the Watchdogs

Regardless of the incentives and corporate America's spotty track record, at least some in the accounting community believe companies will try to be honest about their options estimates -- or will be forced to.

Auditors could keep firms in line if they "feel that the assumptions are getting outside of what's reasonable," suggested Chuck Mulford, a professor of accounting at the Georgia Institute of Technology. "That's one governor on assumptions."

Likewise, FASB's Crooch thinks that with all the intense scrutiny on corporate governance and accounting following the corporate scandals of recent years, companies will do their best to give the most accurate numbers.

From a practical perspective, options cost -- accurate or not -- may end up being overlooked by analysts and investors. Just as many focus on EBITDA, or earnings before interest, taxes, depreciation and amortization, they are likely to exclude options expenses from their earnings estimates.

"Because this is a noncash expense, most people are going to pro forma it out in their analysis," said Jeff Brotman, a professor of accounting at the University of Pennsylvania's law school.

That is, of course, until some company -- or companies -- takes advantage of the gray areas of options expensing and Wall Street's curious leniency when it comes to accounting matters.

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