Who Rules Accounting?

Congress muscles in on FASB -- again.

In other words, how FASB votes on options expensing may depend on how William Donaldson handles the board’s paychecks.

FASB’s Surgeons

On its own terms, the legislation now before Congress poses less of a threat to FASB’s independence than a bill introduced a decade ago.

In 1993, legislation introduced by Sen. Joe Lieberman (D-Conn.) would have not only nullified the effect of the proposed FASB standard on stock options but also effectively put the board out of business, notes then-FASB chairman Dennis Beresford.

The bill, which garnered broad support, required the Securities and Exchange Commission to redo the whole standard-setting process. Faced with its likely passage and virtually no support for its project by executives, the accounting industry, or the SEC, FASB backed away from expensing, instead requiring disclosure of the cost of options only in the footnotes of financial statements.

The Senate ultimately voted 88 to 9 for a nonbinding resolution that urged FASB not to expense stock options. “It was basically a warning shot,” says Beresford, “but the bigger concern was the actual legislation proposed by Lieberman.”

“The difference now is that they’re dealing only with the stock-options issue,” Beresford says of the bill introduced in March by Rep. David Dreier (R-Calif.) and co-sponsored by Rep. Anna G. Eshoo (D-Calif.). “It’s more of a surgical strike.”

Since a House subcommittee hearing on the bill in June, 13 representatives have joined as co-sponsors, for a total of 53 bipartisan supporters. That represents more than 12 percent of the total 435 House representatives. A companion bill, S. 979, introduced in the Senate in May by John Ensign (R-Nev.) and co-sponsored by Barbara Boxer (D-Calif.), faces a more uncertain future despite having a higher level (19 percent) of bipartisan support. Senate Banking Committee chairman Richard Shelby (R-Ala.) recently said he would deny that bill a hearing in the Senate, believing as he does that lawmakers shouldn’t be interfering in FASB’s affairs.

But as the outcome of Congress’s last battle with FASB over stock options suggests, legislation needn’t be enacted to have the desired effect. —C.S.

D.C. Versus the Board

Stock options haven’t been the only source of friction between the Financial Accounting Standards Board and its federal overseers. To be sure, the Securities and Exchange Commission has only officially overridden FASB once since the board’s inception in 1973. That decision came a few years later, as FASB was writing rules for oil and gas exploration and development costs.

Congress, for its part, has taken an interest in several other FASB projects over the years, including accounting for derivatives and the business combinations and goodwill project. The latter issue, which ultimately eliminated pooling of interests accounting, spawned legislation and arguments that are strikingly similar to those stemming from today’s options-expensing debate.

During hearings on the proposed elimination of pooling, for instance, Cisco Systems Inc. CFO Dennis Powell, then corporate controller, warned during a Senate hearing that the proposal “will certainly stifle technology development, impede capital formation, and slow job creation in this country.” He further argued that a switch to the purchase model would lead companies with a higher percentage of acquired intangible assets “to report an arbitrary, artificial net-income number that is irrelevant and misleading.”

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