The Corporate Reform Weekly
Vol III, #14
April 5, 2004
In Short
In Business
Accounting
1. FASB unveils proposal for stock options, tech companies intensify opposition
Scandal
2. Tyco case ends in mistrial after six months and 12 days of deliberation
3. KPMG and Bearing Point pay $34 million to settle overbilling case
In Washington
SEC
4. SEC asks for more money, Congress asks for more new hires
This Week’s Action Item
Tell Congress to stand up for honest accounting and protect small investors!
In Business
Accounting
1. FASB unveils proposal for stock options, tech companies intensify opposition
The Financial Accounting Standards Board last week released a much-anticipated draft proposal of a new rule that would require corporations to count stock options as an expense on their balance sheets. The rule, which is designed to take effect for 2005 financial statements, will be open for a 90-day comment period.
The announcement of the rule set off a flurry of criticism from members of the high-tech industry and their allies in Congress, who want to keep open a loophole that allows stock option grants to remain as the only kind of compensation not treated as an expense. The high-tech industry, which heavily uses stock options to compensate employees, has argued it would be hit hard if options were forced to be expensed.
That’s why the industry is lobbying fast and furious in Washington to line up co-sponsors for HR 3574, a bill that would block FASB from implementing its rule to expense options. The tech industry recently earned the support of House Speaker J. Dennis Hastert (R-Ill.) and House Minority Leader Nancy Pelosi (D-Calif.).
Opponents of expensing options argue that doing so would destroy jobs, hurt start-up companies, and be bad for the economy. “This issue cuts to the heart of job creation, economic growth, and competitiveness,” said Rep. Anna Eshoo (D-Calif.), a co-sponsor of HR 3574.
Yet, a report issued by the Congressional Budget Office last week indicates just the opposite: The report concluded that “recognizing the value of stock options is unlikely to have a significant effect on the economy.” Moreover, although the new rule would reduce earnings by tech companies by billions of dollars, the report argued that stock prices would not suffer. Meanwhile, the rule would help investors by giving them a clearer picture of corporate profits.
The report echoed what investors groups have been saying all along – that requiring companies to count stock options as an expense is essential for honest and transparent accounting. Indeed, many consider the deceptive accounting practices surrounding stock options as one of the key factors behind the recent wave of corporate scandals.
“This is the day the investment community has been waiting for,” said Patrick McGurn, a senior vice president of Institutional Shareholders, of FASB’s proposal. “This is the beginning of accounting transparency.”
Hundreds of companies have already begun expensing options and have found it had no effect on their stock price. Meanwhile, Alan Greenspan, Paul Volcker, John Snow, William Donaldson, Arthur Levitt, John Biggs, Warren Buffet, the Investment Company Institute, the Council of Institutional Investors, AFL-CIO, the Consumer Federation, Citizen Works and other business leaders and national organizations have supported a rule that requires expensing.
The battle over options is shaping up as a repeat of a 1994 battle, when FASB’s initial attempt to require options to be expensed was forcefully beaten back by Congress, with the support of the tech industry. But this time around, there is much more support for counting options as expenses. Still, a vote in the House on the bill could come after Easter recess. A companion bill in the Senate (S. 1890) does not enjoy as much support, and lacks support from Banking Committee Chair Richard Shelby (R-Ala.). But it could get tacked on as an amendment.
For more, see:
“House Opposition to Expensing of Options Increases: Bill Would Block Accounting Oversight Board’s New Rule,” by Jackie Spinner of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A34526-2004Mar29.html
“Wages of Bad Accounting: Bosses Got Rich While Companies Borrowed,” By Floyd Norris of the New York Times: http://www.nytimes.com/2004/04/02/business/02norris.html
“CBO: Expensing Options Won’t Hurt Economy,” by Reuters: http://www.reuters.com/newsArticle.jhtml?type=businessNews&storyID=4740783
“Wall St. Discounts Option Rule Shift; Investors say a possible accounting change won’t discourage them from buying tech stocks,” by Tom Petruno of the Los Angeles Times: http://www.latimes.com/business/investing/la-fi-options31mar31,1,854611.story?coll=la-headlines-business-invest
Scandal
2. Tyco case ends in mistrial after six months and 12 days of deliberation
The trial of former Tyco CEO Dennis Kozlowksi and CFO Mark Swartz ended last week in a mistrial after six months of trial and 12 days of unsuccessful jury deliberations. Prosecutors say they plan to try the case again.
Kozlowski and Swartz were accused of stealing $170 directly from the company and then taking another $430 million through secret sales of company stock which they had “artificially inflated.”
The highlight of the half-year long trial were details of Kozlowski’s lavish life as CEO of Tyco and the many things he spent money on, including a $17,100 traveling toilet box, a $15,000 dog umbrella stand, a $6,000 shower curtain, and a $2 million Sardinian birthday party featuring dancing nymphs and an ice sculpture of Michaelangelo’s David spouting vodka.
But in the end, it appears that a single juror “stopped deliberating in good faith” (according to a note by the rest of the jury) and because of a “poisonous” atmosphere, Judge Michael J. Obus declared a mistrial, telling the jurors, “it is certainly a shame that this has to be done at this time.”
However, controversy is surrounding the one hold out juror, who according to news reports, appeared to signal “okay” to the defense table at some point during jury deliberations, which set off a flurry in the New York media. The New York Post, for example, ran a front-page story identifying her by name and calling her “Ms. Mistrial.”
Though lawyers for Kozlowski and Swartz had asked for a mistrial following the media frenzy, they said they were disappointed in the outcome, “We are disappointed that because of events that occurred outside of the courtroom, we were unable to bring this case to verdict,” said Stephen Kaufman, Kozlowski’s lawyer.
Were Kozlowski and Swartz convicted, the grand larceny charges would have carried minimum prison time of one to three years. The other charges – falsification of business records, conspiracy, and securities fraud – carry no mandatory prison time.
Next for Tyco, former general counsel Mark Belnick is scheduled to be in court on April 12, when his trial begins. Belnick is charged with illegally taking a $12 million bonus.
For more, see: “Judge Declares Mistrial in Case of Ex-Tyco Executives,” by Andrew Ross Sirkin of the New York Times: http://www.nytimes.com/2004/04/02/business/02CND-TYCO.html
“Corporate watchdogs work,” USA Today editorial http://www.usatoday.com/news/opinion/editorials/2004-04-04-edit_x.htm
“Jurors, Fresh From Deliberations, Recall What Led to Tyco Mistrial,”
http://www.nytimes.com/2004/04/05/nyregion/05juror.html
3. KPMG and Bearing Point pay $34 million to settle overbilling case
Accounting firm KPMG and Bearing Point, its former computer consulting firm, each agreed to pay $17 million to clients to settle charges that they had overbilled clients for travel expenses by not passing on bulk discounts they received.
PricewaterhouseCoopers had earlier agreed to a $54.4 million settlement for overbilling in the case. Ernst & Young and Cap Gemini are still defendants.
In settling the class action lawsuit last week, KPMG and Bearing Point denied any wrongdoing.
For more, see: “KPMG and Ex-Unit Settle Overbilling Case” by Bloomberg News: http://www.nytimes.com/2004/04/05/business/05kpmg.html
In Washington
SEC
4. SEC asks for more money, Congress asks for more new hires
Former SEC Chairman William Donaldson went before Congress last week to ask for a $913 million budget for next year -- $20 million more than the Bush administration’s proposal of $893 million. He was met by questions of why he still needed to fill 425 positions, despite a near doubling of the SEC’s budget over the last few years.
Donaldson said that he had filled 740 new staff positions since December 2002, bringing the total SEC staff to 3,400. But, he said, “we don’t just want to fill slots.” Though junior accountants at the SEC can earn $70,000 a year, private-sector accounting jobs continue to pay more.
Still, turnover at the SEC, a persistent problem in the 1990s, is dropping. Donaldson told Congress that the commission’s turnover rate had dropped from 8 percent in FY01 to 1.5 percent in FY03.
Donaldson also said that the new staff had helped. “With this staffing increase, the SEC has increased the frequency of examinations of funds and advisers posing the greatest compliance risks and is conducting more examinations targeting to areas of emerging compliance risk.”
For more, see: “Lawmakers query SEC boss about hires, budget,” by Robert Schmidt of Bloomberg News: http://www.detnews.com/2004/business/0404/01/b03-109342.htm
This Week’s Action Item
Tell Congress to stand up for honest accounting and protect small investors!
Now that the Financial Accounting Standards Board (FASB) has issued its proposal for accounting for stock options, the high-tech industry is desperately trying to block the FASB from implementing a rule that would require options to be expensed.
Their strategy is to get a bill passed (HR 3574 in the House, S 1890 in the Senate) that would require the SEC to study the economic impact of expensing stock options for three years, effectively blocking the FASB from requiring options to be expensed. The bill strikes a crushing blow at the independence of FASB by letting a handful of tech-company lobbyists use their political influence to keep open a loophole that allows for dishonest and misleading accounting.
High-tech lobbyists have won the support of House Speaker J. Dennis Hastert (R-Ill.) as well as minority leader Nancy Pelosi (D-Calif.) and HR 3574 is gaining momentum in the House. Though the Senate companion bill (S. 1890) is not gaining as much support, there is a good possibility it could get tacked onto a bill as an amendment. If both bills pass, we will have lost the battle for honest accounting.
These bills are moving forward because while members of Congress are being bombarded by high-tech industry lobbyists, they are not hearing from citizens and small investors who want them to stand up to corporate special interests and stand up for honest corporate accounting.
That is why it is essential that you contact your Senators and your Representative today and tell them to stand up against more Enron-style accounting. Tell them that you are counting on them to support FASB’s plan to require stock options to be expensed.
For a sample letter to your Representative on HR 3574: http://www.citizenworks.org/corp/options/congressletter3574.php
For a sample letter to your Senators or S 1890: http://www.citizenworks.org/corp/options/congressletter1890.php
For talking points, see: http://www.citizenworks.org/corp/options/s1890-talkingpts.php
For a complete resource on Stock Options: http://www.citizenworks.org/corp/options/options-main.php
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News summaries based on original reports in other publications are prepared by Citizen Works staff and are not created, sponsored, approved or endorsed by the publications to which the original reports are attributed.
