Who Rules Accounting?

Congress muscles in on FASB -- again.

A Delaying Tactic

How will the new battle turn out? Because of the dangers posed by the proposal in Congress, some observers predict it won’t get very far. “I don’t believe in the face of continuing revelations of accounting misdeeds that Congress is likely to destroy the standard-setting process,” says Levitt. “It’s just a delaying tactic.”

Levitt isn’t alone in dismissing the threat. TIAA-CREF’s Clapman believes some lawmakers who may have been comfortable 10 years ago openly favoring the high-tech-industry position on options are reluctant to do so today. “A congressman or -woman who looks at this knows that their position is being scrutinized in ways that were not the case back in 1993,” he says.

What’s more, big accounting firms like Ernst & Young and shareholder lobbyists like the Council of Institutional Investors have reversed their opposition to expensing, while nearly 300 public companies, including Microsoft, have adopted it during the past 18 months in anticipation of a change in the rules. While Microsoft recently abandoned new options grants in favor of restricted stock, the technology bellwether has also decided to expense options already granted.

The SEC has historically supported FASB’s decisions, and chairman William H. Donaldson is on record as favoring the board’s efforts to expense options. FASB “has put itself on the line and said there’s an expense attached to stock options,” Donaldson told the Economic Club of New York in May. “I am waiting restlessly for this to happen.” But will Donaldson stick to that position under pressure from Congress or the White House?

With enough political support for the bill, Eshoo predicts that the head of the SEC would find it difficult not to go along. “Certainly, chairman Levitt did,” she observes. Levitt himself thinks Donaldson will stick to his guns. “We have an SEC chairman that is solidly behind the expensing proposal,” he says.

To be sure, Donaldson also said publicly that he plans to visit with executives in California who oppose expensing options. “I am willing to listen,” he said in May. But he told them not to get their hopes up. “As far as I’m concerned,” he warned, “we have crossed the Rubicon.”

Perhaps. Congressional support for the bill is by no means overwhelming at this point. But Beresford fears that Sarbanes-Oxley has inadvertently made FASB more vulnerable to political pressure. Previously, about a third of FASB’s annual budget came from voluntary contributions from public accounting firms, the AICPA, and some 1,000 individual corporations.

Under Sarbanes-Oxley, those voluntary contributions are replaced by mandatory fees from all publicly owned corporations based on their individual market capital-ization. But the fees are to be collected by the newly formed Public Company Accounting Oversight Board. And the SEC oversees the PCAOB.

While Beresford believes the new setup gives FASB more independence from the business community, he says, “it’s not clear that it has more independence from the political process. In fact, it may have less [independence] from Congress and other people in Washington.” Under the new arrangement, it’s a pretty simple matter for the SEC to pressure FASB. “The SEC could give them a hard time with their budget,” notes Beresford, “and just not get around to collecting the money they made.”

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