Barrett criticized the Financial Accounting Standards Board (FASB) and suggested the fight against stock option expensing is far from over. The remarks come on the heels of FASB’s decision to require stock option expensing (See FASB Says Yes to Option Expensing ), according to a Reuters report.
“FASB is being a bit disingenuous in terms of their inviting opinion, inviting discussion, on whether options should be expensed or not,” Barrett told Reuters. “They went directly from Enron and WorldCom to ‘Let’s figure out how to expense options because there’s this public outcry against CEO compensation.'”
The technology industry, which relies on stock options to attract and motivate employees, has long fought against efforts to treat stock-option costs as a regular business expense, since doing so would pummel earnings due to the difficulties in valuing stock options. Like many of its techno-peers, Intel argues that the most widely used model for valuing stock options, the Black-Scholes model, comes up with a misleading figure for stock option costs and in turn, would lead to misleading financial statements. This contention is backed up by research from the Financial Executives Research Foundation (FERF) that found of six stock option valuation models, the Black-Scholes method systematically overvalued stock options (See Black-Scholes Overvalues Stock Options ).
This overvaluation presents a quagmire to executives who might end up violating Sarbanes-Oxley provisions requiring company chiefs to sign off on financial results. “If stock option expensing becomes reality, it leaves CEOs with two options: Comply with Sarbanes-Oxley and certify as accurate numbers that are inherently flawed,” Barrett said. “Or, support the spirit of the new law and refuse to sign off on the numbers because we don’t believe they present an accurate financial picture.”
Barrett dismissed as “speculative” the question of whether he would ultimately refuse to sign off on Intel’s financial statements if stock option expensing became mandatory. But he said he had discussed the idea with other technology companies and promised to continue lobbying aggressively against stock option expensing.
Call to Arms
The calls for civil disobedience are very similar to threats from some corporations threatening to mount a fee embargo to funding both the FASB and the newly formed Public Company Accounting Oversight Board (PCAOB) created under the Sarbanes-Oxley Act if mandatory option expensing became the law. Under the new system, corporations would be required to pay regular fees to support the national accounting standards-setter. Previously, FASB relied heavily on voluntary contributions to fund its operations. (See Companies Prepare FASB Fee Boycott).
Further echoed in Barrett’s comments are those of the Santa Clara, California-based company’s Chairman of the Board Andrew Grove, who said in a letter to shareholders, “We are strongly opposed to the mandated use of expensing, which we believe is a deeply flawed method of accounting that will affect the accuracy and clarity of our financial reporting and that has the potential for causing real economic harm to Intel and our stockholders.” (See Intel Aims for Stricter Corporate Governance ).
Grove continued by saying that stock option abuses are not accounting issues, as proponents of options expensing have charged. Rather, abuse should be addressed by holding directors accountable for their decisions concerning executive compensation, a move that is evident in examination of the company’s proxy materials.