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Boost credibility, not inflated profits

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By ROBERT TRIGAUX, Times Business Columnist

© St. Petersburg Times
published July 17, 2002

How did a sleepy Florida grocery store chain suddenly become one of the new icons of corporate responsibility?

Kudos to Jacksonville's Winn-Dixie Stores. Eight years ago, a national accounting standards group recommended (but under pressure by senators, did not require) that companies report stock options made to executives and employees as an actual expense. Only two S&P 500 Index companies -- Winn-Dixie and aircraft builder Boeing Co. -- agreed to do so.

And the 498 other corporations? They chose not to subtract the cost of stock options from the most common measures of earnings.

By taking the easy, if misleading, way to show bigger "profits" -- even as stock options began to explode in popularity -- those 498 companies set the stage for today's uproar over corporate abuse, flimsy accounting and investor distrust. The boom in short-term stock options, which benefited mainly top company officers, gave the boys in the executive suites every incentive to pump up the stock price at any cost. And that spurred the massive accounting deceptions at Enron, WorldCom and dozens of other companies.

Now, those scandals have put the issue on the table for national debate.

Opponents to the change warn that forcing companies to deduct the cost of stock options would lower earnings by 3 percent to as much as 39 percent, driving down stock prices just as the stock markets are at their weakest.

Not so. Markets are sinking because investors don't trust company numbers. More truthful accounting will boost investor credibility, even if inflated profits must decline.

Addressing the confidence crisis, President Bush over the last week criticized corporate accounting shenanigans in several speeches. And in the past two days, the Senate and House overwhelmingly passed major reforms aimed at cracking down on business fraud.

There's only one problem, and it's a big one. The key issue of stock option expensing was ignored in Bush's proposed reforms as well as in the Senate and House measures.

That omission makes the federal attempts at a crackdown ring hollow.

Now, in a show of financial backbone, a few public companies are joining Winn-Dixie and Boeing in expensing options voluntarily.

The Coca-Cola Co. started the new trend this week, saying it will begin listing stock options as expenses. It was followed by the Washington Post Co. Financier Warren Buffett, who has pushed for the accounting change for at least 17 years, sits on the boards of both companies as a major investor.

Bank One Corp., the sixth-largest U.S. bank, Tuesday also said it will join in the switch to make earnings statements more accurate.

Will more companies do the right thing and follow? Some will. But others -- especially U.S. technology companies with heavy addictions to stock options -- are fighting tooth and nail to keep accounting's status quo. They have the most to lose.

Semiconductor giant Intel Corp. estimates its net income last year would have plummeted to $254-million from the $1.3-billion it actually reported, had it subtracted the cost of stock options, the Wall Street Journal reported Tuesday. Cisco Systems, another tech leader, would have lost $2.71-billion instead of the smaller $1.01-billion loss it reported. (See list, Page 1E.)

Dozens, if not hundreds, of other mostly tech companies also would have reported sharply lower profits (or larger losses) had they accounted for stock options. Even Wal-Mart says stock option expenses would have wiped out $200-million, or about 3 percent, of its $6.7-billion profit last year.

TechNet and other technology industry lobbying groups last week helped kill a Senate proposal by Michigan Democrat Carl Levin and Arizona Republican John McCain -- blocked by Democrats -- that would have required companies to treat options as an expense on balance sheets. Again on Tuesday, Senate Republicans stopped a watered-down amendment by Levin that would have required the Financial Accounting Standards Board, the national accounting rule-making group, to study the stock option issue and within one year develop new accounting standards.

High-tech firms argue that options are vital to attract workers and to make top executives more in touch with a company's performance. Critics, notably Federal Reserve chairman Alan Greenspan and multibillionaire Buffett, counter that options have mutated into a perverse incentive for corporate executives (although Greenspan punted Tuesday by telling a Senate committee he'd like to see companies make the change on their own accord.)

Greenspan and Buffett are no dummies.

It's tough to feel sad for Intel and Cisco. They are big enough to deal with the temporary financial upset of accounting for options as costs. There would be more hardship at the start at many smaller companies because expensing options initially would cause their earnings to go negative.

Most affected would be young tech firms and entrepreneurial startups. As businesses with little cash that must attract talent with offers of stock options, they would be hard pressed to account for options as direct costs.

Opponents also argue that stock options can't be expensed because there is no accurate way of knowing what they will be worth at the time they are ultimately exercised. Without clearly defined costs, they argue, expensing stock options would only create yet another opportunity to manipulate earnings.

Enter Coca-Cola. Not only did the Atlanta soft drink maker back the expensing of options but it also offered a new formula for doing so. It plans to ask investment banks to place bids on the options, and average those to set a price.

Will Coke's new approach work? Let's give it a tryout.

If we don't, there's little reason for the bear-driven stock markets to head north any time soon.

"It's more important now to report honest figures than big figures," Buffett told one reporter this week. "The tide is turning."

Hey, that sounds almost bullish.

-- Robert Trigaux can be reached at or (727) 893-8405.

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