|
I can't speak to Parish's application of the SAS (cf aicpa.org,
but for all my dislike of their products, I see MSFT's financial reporting as aggressive, not fraudulent. Their
behavior appears legal, and merely (ahem) takes advantage of
current tax law to maximize cash flow. That they further leave
their options grants unhedged (and do, de facto if not de GAAP
incur a contingent liability) is a separate issue. Now that
FASB requires a fair level of detail on ESOPs (like derivatives, which options after all are) in the footnotes,
I see this issue confined to the analysts' purview. As
an analyst I'd be nervous about the sources of Microsoft's cash
flow and compensation savings; I'd adjust their EPS down
from reported levels to reflect options expense hidden under APB 25;
I'd perform a sensitivity analysis to estimate the effect on
their valuation of changes in legal or market environment --
but I would not ship them off to jail. Rather, given my
druthers I'd require SFAS 123 for headline EPS and discontinue
favorable tax treatment, both of which I see as distortions.
Recall that I see options as having intrinsic value,
which needs to be charged against earnings if written,
whether to employees or to third parties. I see unhedged
ESOPs as a sort of tax-leveraged liability; as the stock goes up,
so does the liability -- but with the promise of saving a third
of the gains above the strike on taxes. If the stock goes down,
the options expire, and the company keeps 100% of the implicit
premium, just like an options writer in the market. It is this
tax-induced asymmetry that makes nonqualified ESOPs so very
attractive and underlies my opinion on distortion. -mb |
