Showdown Over Stock Options Comes to House

WASHINGTON (AP) - In a showdown pitting donor-rich Silicon Valley against key regulators and big investors, the House is moving to block a proposed requirement that companies deduct from their profits the cost of stock options.

Stock-options legislation has sliced through House committees and across party lines in recent months, propelled by lobbying by deep-pocketed high-tech companies eager to favor friendly lawmakers in an election year. It is aimed at a proposal by the Financial Accounting Standards Board to force publicly traded companies to record all forms of share-based payments to employees, including stock options, as expenses.

The change proposed by the board in March answered the call for accurate corporate income statements after the scandals at Enron, WorldCom and elsewhere. It could dramatically reduce the reported earnings of many big companies, particularly in the high-tech industry, where stock options have been popular.

The House was voting Tuesday on a bill to override the FASB move. The bill is backed by House leaders of both parties and the majority of lawmakers, although similar legislation has stalled in the Senate.

Supporters of the legislation say a mandate to count options against the bottom line would muddy income statements even more, discourage startup companies and hurt the economy by stifling future innovation.

"I fear FASB is beginning to stand for Flatten All Startup Businesses," said Rep. Richard Baker, R-La., chief sponsor of the legislation with Rep. Anna Eshoo, D-Calif.

The bill would limit required expensing of options to those owned by the top five executives in a corporation. It also would allow newly public companies to delay expensing for top executives in the first three years.

Companies now don't have to record the cost of options as an expense on their financial statements, though hundreds have begun to do so voluntarily. Instead, they only must include the potential cost in a footnote, making it difficult for investors to gauge their effect on earnings.

"In light of Enron and the other major accounting scandals, Congress should be strongly backing more corporate accountability, not less," Sally Greenberg, senior counsel for Consumers Union, said in a statement Monday. "Congress should be insisting that investors get the best, most accurate information. But this bill would mean less, not more, accuracy in accounting."

Stock options are blamed by some for fueling corporate abuses in recent years by enticing executives to manipulate earnings to pump up the stock price and then sell their lucrative personal holdings. Still, options remain a popular compensation tool to help motivate employees. They can buy shares at a fixed price and sell at a profit if the company's stock rises.

Among the proponents of mandatory expensing of options are Federal Reserve Chairman Alan Greenspan, Securities and Exchange Commission Chairman William Donaldson, billionaire investor Warren Buffett and the Big Four accounting firms. Institutional Shareholder Services, a group that advises big investors such as pension funds and mutual funds, has been particularly vocal in urging the FASB proposal.

Arrayed opposite are members of a lobbying coalition that includes Agilent Technologies, Cisco Systems, Coors Brewing, Dell, General Mills, Intel and Sun Microsystems. Also opposed to mandatory expensing are the Nasdaq Stock Market, home to numerous big high-tech companies; the National Association of Manufacturers; the U.S. Chamber of Commerce; and the Business Roundtable, which represents chief executives of the largest U.S. corporations.

If the FASB proposal is formally approved, it would be effective for the fiscal years beginning after Dec. 15.

FASB's chairman, Robert Herz, said last month the panel may delay a final rule because Corporate America already is straining against deadlines to implement other new regulations, enacted in 2002 in response to the scandals.

Donald Nicolaisen, the SEC's chief accountant, has said FASB should consider delaying the rule to 2006.

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The bill is H.R. 3574.

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On the Net:

Congress: http://thomas.loc.gov/

Financial Accounting Standards Board: http://www.fasb.org/