Magazine article The CPA Journal

Tell the Truth, Unless It Hurts

Magazine article The CPA Journal

Tell the Truth, Unless It Hurts

Article excerpt

Personal Viewpoint

Tell the truth, unless it hurts-or unless it's politically dangerous. "We can't stand by and let accountants wearing green eyeshades decide who is going to get the American dream," said Senator Barbara Boxer (D-Calif.) before a Silicon Valley lobbying organization. And, in a letter jointly written with 14 other senators, Senator Mike Enzi (R-Wyo.) said that FASB's procedures are "seriously flawed" and it should "back up a step and do the critical thinking and analysis that we should expect" before changing the rules. The letter further says that a rule which would require companies to deduct stock option costs from earnings would "eviscerate" compensation plans that distribute options to all employees. These statements were provoked by FASB's decision to consider adding stock option accounting (yet again) to its agenda.

Since then, FASB has decided to do so, and I applaud and fully support that decision. If, however, FASB had decided not to address this issue, I would have understood: It would have been because of the concern over a repeat of the political pressure FASB faced when the issue was last debated in the mid-1990s. That debate resulted in a compromise that required only the disclosure of options, rather than proper accounting. Now that FASB has decided to revisit the topic, we will again see significant political pressure brought to bear to keep FASB from changing the current antiquated accounting rules.

Senator Enzi says "do the critical thinking." I cannot think of any accounting subject that has been thought about critically more than stock option accounting. Moreover, unlike many legitimate debates on accounting issues, I've never heard an accountant convincingly support, on the merits of the accounting, the current rules. Rather, the Senator's comments are nothing more than another threat, and a thinly veiled one at that.

In no way do I mean to speak disrespectfully of the FASB members who reached the "compromise "the last time. I believe they did the only practical thing at the time, in the face of Congressional leaders and others who threatened to put them out of business. Because of this pressure, the SEC even gave up its support of this much-needed rule change. Why the pressure? Hightech (and other) companies said they liked the current rule, which was written in 1972 and was itself a compromise. (I admit that most accounting firms also supported this view.) The companies said the current rule worked because it was understood, it had served the public well for many years, and it was simple to apply.

But not so! First, it was not well understood. In fact, only a few professionals in the national offices of large accounting firms really understood it. It was so well understood that in 2000 the FASB issued an interpretation to assist understanding and to curb abuses. Did this guidance-the longest interpretation FASB has ever issued-make the rule understood? No. FASB's Emerging Issues Task Force (EITF) has since had to consider and conclude on more than 50 implementation issues regarding this interpretation.

Second, the rule had not served the public well. It encouraged companies to develop stock option plans for their executives which were less economical for companies and their current stockholders. Those plans often led to executives realizing significant increases in wealth for reasons that had little if anything to do with their efforts.

Last, the rule was not simple to apply. The only simple thing about the rule was the real reason companies wanted to maintain it: to avoid recording a major expense in their income statements. …

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