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Accounting Debate Sparks Anxiousness
by Teri Rucker
Lawmakers anxious to ensure investor trust in corporate accounting and financial reporting have offered several proposals that could have repercussions on the technology sector, and industry groups are getting nervous. But some consumer advocates see an opportunity for long-needed regulation of a largely unchecked industry.
"The fact is that some regulators have taken a hands-off approach in recent years," said David Butler, a spokesman for Consumers Union, "and that helped create an environment where oversight was not as strict as it should have been."
The proposals, generated in large part by the financial woes of the Enron energy firm, cover everything from whether companies should claim on their tax returns the stock options they grant to employees and when employees should pay taxes on those options. Another measure would address the right of investors to sue companies for errors in financial reporting, and Congress also is looking broadly at whether to revise standards that govern the accounting industry.
Butler believes Congress must do something. "We think this [Enron controversy] underscores the need for tougher standards to protect consumers," he said. Butler added that federal regulation would not fix every problem, but lawmakers can "set standards by which people can expect their finances to be protected."
But industry observers hope members of Congress will make measured decisions. "My only concern in all of this," said Brian Kelly, senior vice president of government relations and communications at the Electronic Industries Alliance, "is [that] they don't go too far, that efforts be reasoned ... and not be a knee-jerk reaction to the Enron thing," referring to the abrupt demise of the firm.
It's an Option
A bill that would require firms to account for the value of employee stock options if they take tax deductions for those options is of particular concern. Sens. Carl Levin, D-Mich., and John McCain, R-Ariz., introduced the measure, S. 1940.
Similar legislation faltered after being introduced in 1997, and while the tech industry hopes the Levin-McCain bill meets a similar fate, officials are concerned. "What were lousy ideas that were successfully defeated previously come back and have a whole new shimmer on them," said Caroline Graves Hurley, tax counsel and director of tax policy at the electronics group AeA. She compared the bill to the horror film "Night of the Living Dead."
Bill sponsors say the legislation would merely rectify an anomaly in accounting practices. "Stock options are the only compensation expense that the Financial Accounting Standards Board [FASB] has said they don't have to charge to earnings," a Levin spokeswoman said. She added that if companies count the options as an expense in order to take tax deductions for them, they should be accounted for as an expense on financial reports.
FASB considered a proposal similar to that in S. 1940 but ruled that employee stock options just be included in the footnotes. Levin's spokeswoman argued that FASB made that decision because of intense lobbying by corporations that "wanted to protect stock options for their CEOs," adding that "it wasn't right in the first place and it's not right today."
Graves Hurley said that while the proposal sounds simple and logical, in practice it would be a constant drag on earnings and punish stronger companies. Employees are more likely to exercise their stock options when the company's stock price is doing well.
The legislation would harm, if not destroy, the policy of employee stock options, she said.
Not You, Too
The International Accounting Standards Board (IASB) is considering a similar proposal, and early indications are that the board will not adopt existing U.S. principles, despite the best efforts of U.S. firms to steer the IASB in that direction.
The board recently crafted a proposal on "accounting for share-based payment," saying that firms should factor employee stock options into their financial statements with a charge against their income statements. During testimony before the Senate Banking, Housing and Urban Affairs Committee in mid-February, IASB Chairman Sir David Tweedie noted that the board has not made a decision but believes stock options are "an expense that needs to be charged."
The accounting changes will be controversial, Tweedie said, urging lawmakers to resist lobbying to get the United States to thwart the international effort.
IASB also plans to tackle accounting rules for intangible assets, such as patent rights, brand names and customer lists, and business combinations, but the board has not yet formulated proposals.
Tech-focused lobbying group TechNet considers the issue of international accounting standards one of its top priorities this year.
I'll Sue
The tech industry is wary of another bill, S. 1933, that would repeal parts of the Private Securities Litigation Reform Act. It would lift the cap on the amount that a third party, such as consultants, could be held liable for when making willful misstatements in financial reports, and it would extend the statute of limitations for lawsuits. The measure also would allow suits to be pursued in state courts rather than just federal court.
"Too many in the securities industry have been shielded from investor lawsuits," Sen. Richard Shelby, R-Ala., said when introducing the bill, "and that has removed incentives for doing the right thing as far as investors are concerned."
Graves Hurley is critical of the bill, saying that it would open companies to frivolous suits but do nothing to prevent problems akin to Enron. "When there is bad corporate culture and a company is on a trajectory to making bad accounting decisions," she said, "a company has to fend for itself in the legal process."
No one in the tech industry is certain of the prospects for Shelby's bill. They intend to see who cosponsors it and whether lawmakers intend to push the bill. Shelby introduced the bill alone and has yet to seek cosponsors, his spokeswoman said.
"We're going to sit back and watch" before fighting it, an industry source said.
Other Potential Battlefronts
The Senate Banking Committee, meanwhile, will examine the effectiveness of the accounting and regulatory oversight system, ponder accounting standards, and gauge the independence and quality of outside auditors, Senate Democrats said in a press conference. "It's our intention to pass whatever new laws are needed before the end of this Congress," Majority Leader Thomas Daschle, D-S.D., said.
Sens. Jon Corzine, D-N.J., and Christopher Dodd, D-Conn., also introduced legislation that would restrict independent auditors from providing non-audit services to audit clients and double the size of the Securities and Exchange Commission staff to improve public oversight. And House Financial Services Committee Chairman Michael Oxley, R-Ohio, introduced a bill, H.R. 3763, that would create an oversight board to monitor the accounting industry.
Amid the flurry of legislation, it is unclear what proposals have a chance to become law. "I do think we are going to head toward more disclosure," said Rep. Doug Ose, R-Calif.
Separate from issues related to Enron, Ose sees lawmakers moving on a measure, H.R. 2695, that would prevent the Internal Revenue Service (IRS) from requiring employees to pay taxes when they exercise stock options. Currently, they pay taxes only on any capital gains realized upon stock sales. The bill currently has 23 cosponsors, and Houghton is seeking additional support.
"Congressional action is desperately needed to protect the rank-and-file employees, most notably in the tech sector, which has driven our economic growth in recent years," said Rep. Tom Davis, R-Va.
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