FOR EVIDENCE that votes are bought and sold in Congress, look no further than Tuesday's House vote on accounting rules for stock options. Fully 312 members supported a bill that makes no policy sense whatsoever but that was supported by a coalition of free-spending lobbyists representing venture capitalists and high-tech firms. Fresh from that victory, the lobbyists are descending on the Senate. It is vital that Sen. Bill Frist (R-Tenn.), the majority leader, support Sen. Richard C. Shelby (R-Ala.), the banking committee chairman, in his stated intention of blocking this legislation. Otherwise, other special interests will want to purchase special accounting rules for their own variously special purposes. Ordinary investors will suffer, and so will the fair and transparent capital markets on which prosperity depends.
The House bill's purpose is to squash an accounting rule proposed by the Financial Accounting Standards Board, which would require that employee stock options be treated like any other form of compensation: as an expense reported in corporate income statements. The accounting experts at the FASB have deliberated long and hard about how this expense ought to be calculated, they have heard from outside companies and financiers, and their recommendations closely resemble accounting methods that have been embraced in Canada and Europe. Already 120 out of America's top 500 companies have adopted the FASB's recommendation before being required to, belying suggestions that it is somehow impractical. And yet a majority of the House (that well-known repository of accounting expertise) has voted to block the FASB rule.
In place of the FASB rule, the House offers something that would be comical if the stakes were not so serious. First, it lays down that companies should account for the cost of options given to the top five executives only; this is like saying companies should account only for the top five salaries (all other employees' pay being somehow costless). Second, the House proposes that options should be valued according to a formula that presumes stock prices aren't volatile, a hypothesis you won't find in many finance textbooks. And in the first three years after a company goes public, there would need be no accounting for any employee stock options at all. This would pump up young firms' apparent profits, assisting the venture capitalists who take them public and then sell their own stakes. But what is the accounting principle implied here? That business costs somehow evaporate and then materialize according to how long a firm has been publicly owned?
The point of accounting rules is to give investors accurate information about the state of a firm's finances. If the rules permit expenses to be concealed, investors won't know how to value corporations; they won't allocate savings to the firms most likely to use them productively, and economic growth will slow. The idea of Congress overturning an expert attempt to forge sound accounting rules is inimical to American capitalism. Unfortunately, it is not inimical to the spirit of American politics.