STOCK OPTION ACCOUNTING REFORM ACT -- (House of Representatives - July 20, 2004)
The SPEAKER pro tempore. Pursuant to House Resolution 725 and rule XVIII, the Chair declares the House in the Committee of the Whole House on the State of the Union for the consideration of the bill, H.R. 3574.
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Mr. SHERMAN. Mr. Chairman, I come here as a CPA to fight for the independence of the FASB, an independent board that has given us generally accepted accounting principles which this bill would change to generally political accounting principles. America has to fight in the world for capital.
In China, domestic companies just report pretty much whatever they want on their financial statements. America competes with tough, transparent, enforced, nonpolitical accounting standards. That image has been recently tarnished by recent scandals, and now we are being told to adopt generally political accounting principles that will further tarnish our image.
We are told that it is difficult to estimate the expense amount of stock options, that accountants cannot do it. Well, it is actually a lot easier than things accountants have been doing for centuries involving amortization, obsolescence, depreciation, and dozens of other estimates. We are talking here about executive compensation, some $40 billion a year.
Now, imagine if you gave a crumb to 999 people and a giant cake to one person. You could then come to the floor and talk about a broad-based distribution of carbohydrates. That is in effect what we have here.
When the academics came before our committee, they explained roughly 30 percent of all stock options are in the hands of the top five executives, and the remaining 70 percent is spread very narrowly among other top executives. We have crumbs for the rank-and-file, almost all the options in the hands of the top executives. That is why 80 percent of CEO compensation in this country is in the form of stock options.
Let us say, even though that phoney accounting was good, should we not do it for health care instead of executive compensation? Why not have an accounting principle that says companies can provide employee health care, and we are going to encourage them to do so, and they do not have to list it as an expense on their income statement? The users of accounting information do not want this bill. The Investment Company Institute representing the mutual funds, and Alan Greenspan, for example, have come out against it.
Finally, this bill is absurd politics. It will hurt America in the fight for capital around the world.
This bill, for the first time in history, would overrule the FASB. Let us vote it down.
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AMENDMENT NO. 2 OFFERED BY MR. SHERMAN
Mr. SHERMAN. Mr. Chairman, I offer an amendment.
The CHAIRMAN pro tempore. The Clerk will designate the amendment.
The text of the amendment is as follows:
Amendment No. 2 offered by Mr. Sherman:
In subsection (m) of the matter proposed to be inserted by section 2 of the bill, strike
"(3) FAIR VALUE.-
"(A) IN GENERAL.-The".
and insert
"(3) FAIR VALUE.-The".
In subsection (m)(3) of the matter proposed to be inserted by section 2 of the bill, strike subparagraph (B).
The CHAIRMAN pro tempore. Pursuant to House Resolution 725, the gentleman from California (Mr. Sherman) and a Member opposed each will control 5 minutes.
The Chair recognizes the gentleman from California (Mr. Sherman).
Mr. SHERMAN. Mr. Chairman, I yield myself 1 minute.
Mr. Chairman, this bill is packaged as a bill that requires the expensing of stock options that are issued to the top five executives of every company. This amendment allows the bill to achieve its stated purpose.
The bill, in fact, when one reads the fine print, says that in calculating the value of options given to the top five executives of the company, one does not use either of the two formulas that are established. One does not use the best estimate. But one instead assumes that the stock does not go up or down in price over time, an absurd assumption, an assumption that yields a zero valuation for the stock options given to many top executives in this country.
If we adopt this amendment, then the bill will at least achieve the purpose it sets, namely, that we will have a fair expense reported on the income statement for options given to the top five executives.
Mr. Chairman, I reserve the balance of my time.
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Mr. SHERMAN. Mr. Chairman, I yield 2 minutes to the gentleman from Delaware (Mr. Castle).
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Mr. SHERMAN. Mr. Chairman, I yield myself such time as I may consume.
We are told by the gentleman from Pennsylvania that you should not list an item as expense on the income statement unless cash leaves the company. What if stock options were given to a health insurance company in return for providing health insurance to the employees? Everyone in this hall agrees that would be listed as an expense. What if a company issues stock in return for employee services or stock in return for supplies? Everyone agrees that would be listed as an expense.
Again and again, when a company is getting supplies, when it is rewarding its rank-and-file employees, when it is providing health care, everybody agrees you list that as an expense, even if no cash leaves the treasury of the company. And, yet, we are asked to make one exception, and that is for executive compensation.
Keep in mind the vast majority of these options are going to top executives. Thirty percent of the options are going to just the top five individuals. Now, there is a compromise that is set forward by the authors of this bill, and that is that at least the options going to the top five are going to be expensed. That is the compromise stated in the title of the bill.
And yet, when you look at the details, you see that roughly a quarter of the companies in this country expense stock options. Some use the binomial method. Some use Black-Scholes. No one uses the phony method, also known as the minimum-value method, under which you say you are expensing stock options, but assume zero volatility, a unique approach used only to conceal what the bill would accomplish.
Mr. Chairman, I yield back the balance of my time.
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Mr. SHERMAN. Mr. Chairman, I demand a recorded vote.
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Mr. SHERMAN. Mr. Chairman, I thank the gentleman for yielding me time.
America has to fight to get capital. China lets its domestic companies put anything they want on their financial statements. We respond with independent, nonpolitical, generally accepted accounting principles written by the FASB, an independent board. Under this bill, we would have generally political accounting principles. Capital will go abroad.
No wonder perhaps the best group defending investors, Greenspan, Buffett, the mutual funds represented by the Investment Company Institute and the major pension plans representing public employees all oppose this bill.
We are told that options are broadly based. Thirty percent of the options goes to the top five executives; the other 70 percent are narrowly spread among top executives. That is why 80 percent of CEO compensation in this country comes in the form of stock options.
We are told that it is difficult to do the calculations to expense stock options, but accountants do much more difficult calculations already and have for generations.
We are told that we should adopt an absurd accounting standard, one where if you give an option to the number five person at a company, that is an expense, but the number six person at the company gets an option that is not an expense. Only a political body like Congress would decide that the weights and measures varied dependent upon whether you are dealing with the number five executive or the number six executive.
In sum, Mr. Chairman, imposing political standards in an effort to conceal executive compensation will tarnish America's image for objective financial reporting and hurt our efforts to attract capital from around the world.