Foes of Expensing Welcome FASB Delay

Observers say the regulator's move to postpone options expensing could ultmately contribute to the rule's demise.
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The decision by accounting regulators on Wednesday to postpone by six months a requirement that companies recognize options costs means that the fight over expensing won't end for at least eight more months. Many observers expect opponents of expensing to use the extra time to limit the rule's effects -- or derail the new accounting rule.

"I would be betting that

the expensing rule does not see the light of day," said Robert Willens, a tax and accounting analyst with Lehman Brothers. "I think the opposition forces will prevail here."

Although opponents blocked a similar effort in the mid-1990s, few expected them to succeed this time. Even as recently as March, many observers believed that expensing was

inevitable, and thought the struggle would be all but over by now.

That the issue is still in dispute -- and possibly in doubt -- has much to do with election-year politics and the perceived lack of political sensitivity by the accounting regulators, observers say. With the election so close, the parties are desperate for campaign money. And the technology industry provides a ready source of cash.

"Everyone's willing to do just about anything to get the money to spend," said Lynn Turner, the managing director of research at proxy advisory Glass Lewis and former chief accountant of the

Securities and Exchange Commission.

But politicians are getting more than the tech industry's money. Many members of Congress and senators want to be seen as tech-friendly, said James Lucier, senior political analyst for Prudential Equity Group. The policymakers also tend to agree with the notion that companies should continue to have free reign to use options to compensate employees, Lucier said.

"The stock options guys have won the policy argument on the Hill," he said.

Under current accounting rules, companies can choose whether or not to recognize the cost of the options they grant their employees on their income statements. In reality, few of the most prolific granters of options -- typically companies in the technology and Internet industries -- expense them.

Options were highly popular during the stock market boom, but corporate watchdogs have linked their use and favorable accounting treatment to scandals involving

Enron

, WorldCom and other companies. Amid the growing disfavor, more than 500 public companies have chosen to expense options they grant.

Meanwhile, the Financial Accounting Standards Board has proposed a rule to take away a company's choice to ignore options costs by requiring all companies to expense them.

Despite these developments, the momentum seems to have turned the other way. Advocates of expensing may yet win out, but not without a tough fight, observers say. "This is like trying to stop a snowball coming downhill. It's doable, but it ain't easy," said Turner. "At the end of the day, the odds are in

the accounting regulators' favor, but they're trending down."

Indeed, opponents of expensing have won many of the recent skirmishes and seem to be picking up allies. Among those victories:

The FASB may have eased pressure on itself by its decision to delay by six months the date by which companies would have to start recognizing options costs. That delay came after months of lobbying by members of the technology industry and other heavy options users, as well as by officials at the Securities and Exchange Commission.

Following a lobbying blitz by technology executives last month, more than half the members of the Senate wrote SEC chairman William Donaldson, urging him to delay implementing any new expensing standard to do more testing on the formulas used to value stock options. The letters marked the first time that a majority of the Senate appeared to be in favor of blocking the FASB's plan.

Among those who signed the letters was Sen. Ted Stevens of Alaska, the powerful chairman of the Senate Appropriations Committee. Prior to the letter, the FASB's supporters in the Senate had counted Stevens among their ranks. The effort in the Senate to block the FASB's expensing rule currently focuses on attaching a bill to an appropriations bill -- a tactic Stevens had previously said he would block.

The growing support in the Senate for delaying blocking the expensing rule followed an overwhelming vote by the House of Representatives last summer. The House backed a bill that would limit expensing to companies' top five highest-paid executives, among other restrictions.

The tech industry has vowed to press its advantage and continue its fight against expensing, despite the FASB's decision to delay its proposed rule. In fact, the delay may actually embolden opponents of expensing.

Indeed, Rick White, chairman of the International Employee Stock Options Coalition, an anti-expensing group largely backed by the tech industry, said the FASB's decision amounts "to nothing more than the postponement of a fundamentally flawed expensing standard that will grossly overstate the value of employee stock options."

Noting that the FASB rejected the senators' call for more testing of the expensing formulas, White added, "It is time for the SEC to step in and do what FASB has refused to do."

The FASB has doggedly insisted that companies use formulas such as the Black-Scholes model or the binomial method to value options. Critics complain these formulas were developed for use with options that can be freely exchanged on stock markets, and are inappropriate for use with employee stock options.

As such, opponents of expensing argue that to avoid excessive charges, they'll be forced to stop using options, thus hurting their ability to hire workers, and in turn, their competitiveness. With job growth a big issue in the election campaign, those arguments have found resonance on Capitol Hill.

"The

tech industry has a lot of sympathy," said Lucier. "Members of Congress identify a lot more with tech entrepreneurs than they do with the accountants."

Some observers see the battle over options as perhaps the opening clash in a larger war over rolling back some governance reforms contained in the landmark Sarbanes-Oxley Act. Indeed, those leading the fight against options expensing also are working up plans to fight against Sarbanes-Oxley next year, and already are using similar arguments to oppose both, emphasizing that both disproportionately hurt smaller-sized companies.

"This is going be a priority for us, because companies are pulling their hair out," said John Palafoutas, senior vice president in charge of domestic policy for the tech-industry lobbying group AeA.

To be sure, the expensing proposal has merely been delayed, not defeated. And the expensing opponents still have a tough fight in front of them.

Although sentiment seems to be turning in the Senate, the body closed its final pre-election session this week without taking action on a bill that would block the FASB's expensing rule. The Senate will reconvene after the election, but the focus then will be on appropriations measures, likely leaving little time to consider the options debate.

And opponents of expensing still have to work around the opposition of Richard Shelby, the chairman of the Senate Banking Committee, which has jurisdiction over the issue. Shelby has refused to let his committee even hear the counterpart of the bill that passed the House, much less vote on it. And despite the growing support for delay and for more study on options expensing, Shelby has refused to back down.

"Sen. Shelby's overriding concern is that we don't interfere in the decisions of FASB," said his spokesman, Andrew Gray. "We still have some steps to go through, but we intend to remain vigilant."

And despite the letters, Shelby's sentiments have wide support in the Senate, said Lucier. "They don't want to be in the business of legislating accounting," he said.

If those opposed to expensing aren't able to pass a bill in the Senate this year, they will have to start back at square one next year when a new Congress convenes. That could be good or bad news for opponents, depending on how the election turns out.

"If the Democrats win

the Senate, it'll die," predicts Turner, who acknowledges that the outcome of the debate is still in doubt. "The fat lady hasn't sung here," he said.