Billionaire investor Warren Buffett is urging companies to follow the example set by Coca-Cola Co in accounting for stock options as an operating expense.
"To say options are not an expense that should hit earnings is not telling the truth," Buffett said in an interview. "Investors have been misled in a very material way by certain companies and it has cost them tens of billions of dollars."
Buffett, who is Coca-Cola's largest shareholder, said the erosion of investor confidence in financial reporting would continue to weigh on stock prices until companies improve the accuracy and clarity of quarterly statements. Some investors say that lack of transparency has contributed to a 19 percent decline in the Standard & Poor's 500 Index this year.
PHOTO: AP
Coca-Cola, whose board includes Buffett, yesterday said it will begin expensing stock options issued to employees and executives. Calls by investors for companies to expense options have been spurred by the collapse of Enron Corp, WorldCom Inc and other Internet stocks. US rules require only an estimate of option costs in footnotes to profit statements.
Bush administration officials yesterday warned against amending Senate accounting legislation to force companies to treat options as an expense. Commerce Secretary Don Evans said on "Fox News Sunday" that President George W. Bush's willingness to sign a bill developed by Senate Banking Committee Chairman Paul Sarbanes depends in part on whether Congress refrains from compelling companies to expense options.
Securities and Exchange Commission Chairman Harvey Pitt said such a move might have a "depressing effect" on the values of major corporations. "It could also have the effect of stifling innovation," he said on NBC's "Meet the Press" show.
Buffett said accounting scandals meant "there is not going to be the same trust in corporate America for some time."
"They say it's only in the rinse cycle that you find out how dirty the laundry really was. Now we are in the rinse cycle," Buffett said.
Companies who build a track record for honest and understandable accounting will attract investors, Buffett said.
"A key to restoring confidence is chief executives that tell the truth," he said.
"Any company that builds a record over time for being candid with their shareholders, telling them bad news as well as good news, accounting in way that reflects economic reality rather than tries to cut corners, should be valued more over time than a company that does not have those characteristics."
In a speech on Wall Street to executives and politicians, Bush last week proposed doubling prison time for executives convicted of fraud and setting up a group to police corporate wrongdoing. He said "the misdeeds now being uncovered in some quarters" is hurting workers and investors.
"The president talked about a few bad apples," Buffett said. "People are going to wonder whether there are four or six or eight, and they are not going to take it on faith the same way as before. They are going to look for clues to the quality of financial reporting they are getting."
In addition to Coke, the investor's biggest holdings as of the end of 2001 were American Express Co, Gillette Co. H&R Block Inc Moody's Corp, The Washington Post Co and Wells Fargo & Co.
Buffett's investment company, Berkshire Hathaway Inc, had an 8 percent stake in Coca-Cola as of March. Shares of Coca-Cola shares fell US$2.06 to US$51.05 on Friday. The stock has gained 8.2 percent this year.
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