Posts Tagged ‘Stock Option Accounting’

Senator Joe Lieberman has announced his plans not to seek re-election.  This means that January 3, 2013 will be his last day to serve as the 112th Congress is replaced by the 113th.  Gail Collins, Op-Ed columnist for the New York Times is thrilled, announcing tongue-in-cheek plans for a new book, “Everything Bad Is Joe Lieberman’s Fault.”

Floyd Norris

Piling on, respected New York Times business columnist Floyd Norris suggests that Collins include a chapter on Joe Lieberman’s opposition to an accounting rule on executive stock options.  Norris says that not having a rule to expense executive stock options caused the stock market bubble of the late 1990s.  Floyd, I love you, but you should check with me before you write your next piece on accounting.

Surely Lieberman was promoting his personal interests in fighting the rule, and had no altruistic purpose in mind such as improving the world of accounting.  However, he was correct on this one issue.

Adding the value of executive stock options as an expense on the income statement was a bad idea in the 1990s when Lieberman fought it, it was still a bad idea in 2005 when the FASB adopted it, and it will continue to be a bad idea for as long as the rule is on the books.

Here’s why Norris and the FASB are wrong about expensing stock options.  Traditionally, the income statement has been reserved for (1) the value received from selling products and services, and (2) the money spent (costs) to generate these revenues.  An executive stock option causes no money to be spent by the company.  It is merely a vehicle to increase (potentially) the wealth of the receiving executive by a grant of ownership from the company’s owners.  The current owners take a hit, but that hit has nothing to do with the profit from company operations.  No money is being spent by the company on the executives, and no money will ever be spent by the company on the executives.

The expensing rule is but one example of the the use of accounting rules to accomplish societal objectives.  When executives are granted stock options, the current group of stockholders have been robbed by the company’s board of directors, with the receiving executives as willing co-conspirators.  Crying foul, investors have looked for a way to curb this practice.  Their solution is to add a charge to current earnings, thereby making it more difficult for executives to qualify for their annual bonus.  Unfortunately, the only result accomplished is to diminish the importance of the income statement.

It would be so much more powerful to simply vote out the directors who voted in the executive stock option.  If a few boards were voted out because of granting these options, the practice would dry up in a hurry, I assure you.

Mr. Norris, thanks for writing about accounting.  This time, though, you got it wrong.

Debit and credit – – David Albrecht

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