- WASHINGTON (Bloomberg) --
Senators from both parties blocked a bid by Senator John McCain to force
a vote on requiring U.S. companies to treat stock options as an expense
on their balance sheets.
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- Stock options are central to corporate scandals such
as Enron Corp.'s bankruptcy that lawmakers are focusing on, McCain said.
Texas Republican Phil Gramm and Democratic Leader Tom Daschle said the
measure was irrelevant to legislation to toughen accounting standards that
is under debate.
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- "Why would we not vote on it?'' McCain said on the
Senate floor. ``It's because every lobbyist from the high-tech community
in this town has said, don't do it, don't do it.''
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- Stock options proliferated during the 1990s as a way
to attract employees by letting them buy shares of their company's stock
at below-market prices. The drive to toughen business regulations after
accounting lapses at Enron and WorldCom Inc. has revived a debate over
whether such benefits are a hidden expense that motivates executives to
inflate profits and shield losses to pump up stock prices.
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- Senate Democrats denied a vote on McCain's proposal on
procedural grounds, saying it wasn't germane to the accounting legislation.
Daschle has promised to take up other bills dealing with corporate governance
in September, leaving the door open to McCain to reintroduce it.
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- McCain's proposal, derived from legislation he co-sponsored
with Michigan Democrat Carl Levin, would affect options granted as part
of executive compensation and as incentives for rank-and-file employees.
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- Companies Opposed
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- Companies that use them say options are too difficult
to value. Current accounting rules require the disclosure of options' value
in footnotes in company financial statements.
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- The legislation is opposed by Securities and Exchange
Commission Chairman Harvey Pitt, House Republicans, and by 22 corporate
trade associations representing companies such as Microsoft Corp. and Cisco
Systems Inc.
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- Another opponent is Senator Joe Lieberman, a Connecticut
Democrat. He protested the London-based International Accounting Standards
Board's plans to draft rules forcing options to be charged against earnings.
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- Options and Growth
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- "The IASB proposal, if adopted, would sound the
death knell for the global spread of broad-based stock options plans and
all their accompanying benefits,'' Lieberman said in an Oct. 15 letter
to IASB Chairman Paul Volcker, the former Federal Reserve chairman. The
board is meeting next week to decide on drafting such a rule, which wouldn't
be approved before next year.
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- "We believe that changing the expensing rules on
stock options is a detriment to economic growth,'' said Lieberman spokesman
Adam Kovacevich.
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- Daschle, Senator Jon Corzine of New Jersey and other
Democrats said they wanted to examine the issue more closely.
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- "It seems to me that it's a reach for us to go that
far and to apply a one-size-fits-all statute to all circumstances involving
options,'' Daschle told reporters.
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- The South Dakota Democrat indicated he may support a
plan that Lieberman said he was drafting to ask the SEC to study the expensing
of options.
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- More Study
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- Corzine, in an interview with Bloomberg Television, said
that while he favored treating the options as an expense a fuller discussion
is needed to reach a consensus among senators.
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- "I don't think there's a lot of common ground on
this in the U.S. Senate,'' he said.
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- Gramm said there are already more than 50 amendments
proposed for the accounting legislation sponsored by Senator Paul Sarbanes
and the Senate needed to finish its work. Some companies are already acting
to account for stock options. Standard & Poor's in May said it will
count all employee options when it calculates earnings for S&P 500
Index members. Goldman Sachs Group Inc. Chief Executive Officer Henry Paulson
said June 5 that calculating stock options as an expense is inevitable.
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- Berkshire Hathaway Inc. Chairman Warren Buffett, and
Federal Reserve Chairman Alan Greenspan, and Volcker.
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- Had corporations subtracted the cost of stock options
from their profits in 2001, the decline in earnings of the companies in
the Standard & Poor's 500 Index would have been 21 percent instead
of 18 percent, according to research by Lehman Brothers Inc. last month.
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- Options not counted as an operating cost ``obscure the
company's real worth, misinform investors, and encourage continued false
reporting of profitability,'' McCain said in a speech at the National Press
Club before the Senate debate.
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- Critics of the current system, such as Levin, say current
rules create a double standard.
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- Former Enron Chairman Kenneth Lay exercised $180.3 million
of options from 1998 to the end of 2000, and former chief executive officer
Jeffrey Skilling got $111.7 million from options in that period, according
to company filings. Those sales occurred as the company inflated earnings
by hiding losses in affiliated partnerships.
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