Introducing The Ending The Double Standard For Stock Options Act
Mr. Speaker, I rise today to reintroduce legislation to require accuracy in the way corporations report profits and account for stock options on their Security and Exchange Commission (SEC) earnings reports. I'm pleased to be joined by…
Mr. Speaker, I rise today to reintroduce legislation to require accuracy in the way corporations report profits and account for stock options on their Security and Exchange Commission (SEC) earnings reports. I'm pleased to be joined by Representatives Earl Pomeroy, Henry Waxman, George Miller, John Olver, Jan Schakowsky, Bernie Sanders, Bill Lipinski, and Raul Grijalva in introducing this important bill. Senators Levin and McCain recently introduced companion legislation in the Senate.
Under current law, companies can deduct stock option expenses from their income taxes as a cost of doing business, just like they deduct employee wages. However, companies are not required to similarly report stock option expenses on their SEC financial statements to stockholders. Therefore, SEC reports don't accurately reflect a company's actual earnings because there is an outstanding compensation liability that is not accounted for in the earnings statement. This misleads employees and investors on the financial standing of their investment.
My bill, Ending the Double Standard for Stock Options Act, would help institute accuracy in the reporting of corporate profits. It would require corporations to report stock options as expenses on their SEC earnings statements in order to receive a tax deduction for stock option compensation on the IRS income statement.
Last year, employees and investors faced an onslaught of accounting scandals that led to bankrupt corporations, diminished pension funds and mass lay-offs. While Congress addressed many of the accounting problems that led to the deluge of scandals, the treatment of stock option expensing has not been addressed. Without this reform, corporations will continue to mislead investors on the real value of their investments and undermine the integrity of the market.
The Financial Accounting Standards Board or FASB is the self- regulated accounting board that oversees SEC reporting. FASB recommends that companies record stock options as an expense on their SEC financial earnings statement, but does not require that stock options be treated as an earnings expense. In fact, stock options are the only form of compensation not treated as an earnings expense at any time. FASB is currently rethinking this standard due to pressure from investors and its international counterpart, the International Accounting Standards Board or IASB.
At the end of this year, IASB will issue new accounting standards requiring companies to expense stock options. The FASB is expected to announce in the next month whether it too will issue new stock option accounting standards similar to those of IASB.
It is my hope that FASB will come out with a decision to require expensing of stock options. But as we've seen in the past, political and corporate pressure may dissuade FASB from providing more transparency to earnings report requirements. I hope the introduction of this bill will help encourage FASB to do the right thing and require companies to account for stock options. However, if they succumb to industry pressure, Congress should enact this bill and fix the problem once and for all.
Prior to last year's scandals, nearly all companies relegated their stock option expenses to merely a footnote in their SEC report. Yet, these expenses were not reflected in their bottom line earnings. Since last year's scandals, many more companies have responded to investors' demands that stock options be expensed in earnings reports. Over 120 companies, including Amazon.com, Coca-Cola, and General Motors, have announced that they will voluntarily expense stock options on their SEC earnings reports in 2003. They should be commended. Nonetheless, many other companies have claimed that they will not expense stock options until forced to do so.
Again, Congress took important steps last year to address statutory flaws relating to corporate governance and the accounting industry. My legislation, ``Ending the Double Standard for Stock Options'' is another needed step to help prevent companies from misrepresenting their value to their investors and employees. I urge my colleagues from both sides of the aisle to join me in supporting the efforts of the IASB. Congress ought to heed the call of investors and ordinary Americans to ensure accurate reporting of profits and stock options expensing. I hope my colleagues will join me in passing this bill this year.