Sun, Jul 14, 2002 page10

• US senator evaluates use of options

  ACCOUNTABILITY Carl Levin wants the Financial Accounting Standards Board to develop new rules on how American corporations report their use of stock options

  • NY TIMES NEWS SERVICE
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  Senator Carl Levin said on Friday that he would try to force accounting rulemakers to revisit the issue of how corporations account for stock options.

  It is the second time this year that Levin, has tried to push through Congress a measure to address how corporations handle stock options, which many critics consider a major factor in the corporate financial chicanery that has recently been exposed. He plans to attach his amendment on Monday to the Senate's fast-moving accounting and corporate reform overhaul bill, sponsored by Senator Paul Sarbanes.

  Two days ago, Senator John McCain offered a proposal to force companies to make the accounting change -- a move that would reduce reported profits for some companies by hundreds of millions of dollars. McCain's efforts ran into a buzz saw of lobbying and opposition from lawmakers in both parties, and his amendment was blocked by a parliamentary tactic.

  

  Senator Carl Levin who has called for a review of the stock options issue, talks to reporters, Friday.

  PHOTO: NY TIMES

  Now Levin is giving option reform one more shot, but with a more modest proposal that, he hopes, will have the same ultimate effect.

  Eight years ago, the Financial Accounting Standards Board, which sets rules on how to account for business transactions, was poised to toughen the rules on options and force companies to count options as an expense on their income statements, as they do other forms of compensation. But the board backed down in the face of extraordinary pressure from lawmakers.

  Levin now hopes to require the board to revisit the issue within a year and mandate that the board devise rules, using "an appropriate generally accepted accounting principle."

  Levin believes that the group's board members will come to the same substantive conclusion that they did in 1994 -- that the proper course is require companies to list options as expenses.

  But Levin hopes that the group will not back down this time, saying that his amendment should give the board political cover. He also hopes that other provisions of the Senate legislation that are designed to increase the board's independence from the accounting industry will also make FASB more willing to change the system.

  In other action in the Senate, lawmakers approved an amendment to the Sarbanes bill by Senator Charles Schumer, that would block executives from receiving large personal loans from their own companies. Such loans contributed to the collapse of Adelphia Communications. "Why can't these corporate executives go to the bank like everybody else?" Schumer asked.

  Skewing the picture

  Many institutional investors, and some lawmakers, are concerned that large option grants have increasingly skewed the financial picture of many large companies. Though companies do not have to count options as an expense, the options do come at a cost to shareholders, who find their holdings ultimately diluted when additional stock is issued.

  Moreover, critics worry that option grants contributed to the accounting scandals at Enron and other companies. With executives getting enormous grants every year -- so that moderate changes in stock prices can mean multimillion-dollar gains -- senior managers have too much incentive to push accounting rules, or break them outright, critics say.

  Senate Majority Leader Tom Daschle, who was instrumental in killing McCain's proposal on Thursday, endorsed the Levin plan. "Senator Levin has exactly the right proposal with regard to stock options," Daschle said on Friday afternoon.

  But with a vote on the entire Sarbanes bill expected as soon as Monday night, Levin still has many obstacles to overcome.

  Corporate lobbyists have been working feverishly to stop efforts to change the rules. Technology companies are particularly fervent, saying that options are the most effective way to compensate and retain skilled workers.

  Because of Senate rules and the current state of debate on the Sarbanes bill, Levin needs to get approval from Republicans for his amendment to come up for a vote, according to Senate leaders. But according to Levin and other Democrats, the Republicans did not allow that to happen Friday.

  Levin said that representative Phil Gramm was leading efforts to block the amendment.

  A spokeswoman for Gramm disputed that suggestion and said that Gramm left Washington this morning to inspect flood damage in Texas before Levin tried to bring his amendment up for debate. The spokeswoman, Angela de Rocha, declined to comment on the substance of the Levin amendment.

  The Senate's Republican leader, Trent Lott of Mississippi, said that he did not even know the subject of the Levin amendment. "I've been attending to a lot of issues," Lott said, and "I have not, you know, paid particular" attention to the option amendment.

  It is unclear what FASB might do if the Levin proposal were to become law. Robert Herz, the new chairman of FASB, has made it clear that he personally thinks options should be listed as expenses, but that he is not sure about how to best measure the expense.

  When the board backed down under political pressure eight years ago, it adopted a rule that stated that listing options as expenses was the preferred way of proceeding -- but it allowed companies not to do so. A few companies -- Boeing and Winn Dixie being the best known of them -- chose to follow the preferred method.

  The International Accounting Standards Board, which sets rules that will apply in much of the world, is working on an options rule and is expected to propose one later this year. It is expected to adopt a rule requiring options to be listed as expenses. Under this set of circumstances, the American body would then consider whether to adopt the international rule.
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