Members of Congress are once again inserting themselves into the debate over whether companies should treat stock options as expenses, setting the stage for a possible political battle when accounting rulemakers tackle the issue in the coming months.
More than 70 House and Senate members have signed letters to the Financial Accounting Standards Board (FASB), which has said it will decide by the end of March whether to take up the controversial options issue again.
A coalition of technology companies helped gather signatures from 40 House members opposed to the rule, according to congressional aides. The group includes Rep. David Dreier (R-Calif.), chairman of the House Rules Committee, and several other members from California. While saying they didn't want to set accounting standards, the letter said expensing options would result in "the disclosure of inaccurate corporate financial information and a flawed picture of company performance."
Sens. John McCain (R-Ariz.) and Carl M. Levin (D-Mich.) and Rep. Fortney "Pete" Stark (D-Calif.) are leading the effort to treat the options as expenses. In a letter signed by 30 lawmakers, they urged the FASB to adopt the standard it first proposed in 1993. That letter said expensing options was needed to help restore public trust in the markets and cited "political pressures" that prevented its adoption.
During that earlier effort, a coalition of lawmakers led by Sen. Joseph I. Lieberman (D-Conn.) was so opposed to the plan that it tried to strip the private board of its powers. That effort failed, but the Senate, in a 88 to 9 vote, passed a resolution opposing the stock-option rule. The standards board ultimately backed down at the urging of Arthur Levitt Jr., then Securities and Exchange Commission chairman. Levitt has since said that he was wrong and should have supported the FASB.
Options give employees the right to buy a company's shares at a predetermined price during a specified period. If the market price of the shares rises above that set price, the employee can cash in the options at any point during that period for a profit.
Shareholder groups have criticized the practice of not counting options as expenses, arguing that options should be treated like all other forms of compensation by deducting them from the bottom line.
William H. Donaldson, President Bush's nominee to be replace Harvey L. Pitt as SEC chairman, told the Senate Banking Committee on Wednesday that lawmakers should not try to interfere with the FASB. Donaldson said he supported requiring companies to treat stock options as expenses if international standard-setters adopted a similar rule.
Jeffrey Peck, a lobbyist for the business coalition, said congressional scrutiny is appropriate. "There are a lot of policy issues that go beyond the accounting," he said.
The FASB has received more than 240 comments from company executives and trade groups on the issue. Board Chairman Robert Herz said yesterday that the seven-member board has not yet concluded what it will do.
"We are going to wade through the comments," he said. "We're going to go through our proper process."
Adam Kovacevich, a spokesman for Lieberman, said the senator still opposes treating options as expenses. Asked if Lieberman intended to lead a similar effort against a standard, Kovacevich said the senator, who is running for president in 2004, is "waiting to see how the FASB rules and will cross that bridge when he comes to it."