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To: Ted The Technician who wrote (3000)	7/15/2002 9:19:40 AM
From: Ted The Technician	Respond to of 3076

``To say options are not an expense that should hit earnings is not telling the truth,'' -Warren Buffett Securities and Exchange Commission Chairman Harvey Pitt said such a move might have a ``depressing effect'' on the values of major corporations. --------------------------- From Bloomberg: quote.bloomberg.com 07/15 08:15 Buffett: Companies Should Follow Coca-Cola on Options (Update1) By Jack Duffy New York, July 15 (Bloomberg) -- Billionaire investor Warren Buffett is urging companies to follow the example set by Coca-Cola Co. in accounting for stock options as an operating expense. ``To say options are not an expense that should hit earnings is not telling the truth,'' Buffett said in an interview. ``Investors have been misled in a very material way by certain companies and it has cost them tens of billions of dollars.'' Buffett, who is Coca-Cola's largest shareholder, said the erosion of investor confidence in financial reporting would continue to weigh on stock prices until companies improve the accuracy and clarity of quarterly statements. Some investors say that lack of transparency has contributed to a 19 percent decline in the Standard & Poor's 500 Index this year. Coca-Cola, whose board includes Buffett, yesterday said it will begin expensing stock options issued to employees and executives. Calls by investors for companies to expense options have been spurred by the collapse of Enron Corp. and WorldCom Inc. U.S. rules require only an estimate of option costs in footnotes to profit statements. Bush administration officials yesterday warned against amending Senate accounting legislation to force companies to treat options as an expense. Commerce Secretary Don Evans said on ``Fox News Sunday'' that President George W. Bush's willingness to sign a bill developed by Senate Banking Committee Chairman Paul Sarbanes depends in part on whether Congress refrains from compelling companies to expense options. Securities and Exchange Commission Chairman Harvey Pitt said such a move might have a ``depressing effect'' on the values of major corporations. ``It could also have the effect of stifling innovation,'' he said on NBC's ``Meet the Press'' show. Tens of Billions Buffett said accounting scandals meant ``there is not going to be the same trust in corporate America for some time.'' ``They say it's only in the rinse cycle that you find out how dirty the laundry really was. Now we are in the rinse cycle,'' Buffett said. Companies who build a track record for honest and understandable accounting will attract investors, Buffett said. ``A key to restoring confidence is chief executives that tell the truth,'' he said. ``Any company that builds a record over time for being candid with their shareholders, telling them bad news as well as good news, accounting in a way that reflects economic reality rather than tries to cut corners, should be valued more over time than a company that does not have those characteristics.'' In a speech on Wall Street to executives and politicians, Bush last week proposed doubling prison time for executives convicted of fraud and setting up a group to police corporate wrongdoing. He said ``the misdeeds now being uncovered in some quarters'' is hurting workers and investors. `Few Bad Apples' ``The president talked about a few bad apples,'' Buffett said. ``People are going to wonder whether there are four or six or eight, and they are not going to take it on faith the same way as before. They are going to look for clues to the quality of financial reporting they are getting.'' In addition to Coke, the investor's biggest holdings as of the end of 2001 were American Express Co., Gillette Co., H&R Block Inc. Moody's Corp., The Washington Post Co. and Wells Fargo & Co. Buffett's investment company, Berkshire Hathaway Inc., had an 8 percent stake in Coca-Cola as of March. Shares of Coca-Cola fell $2.06 to $51.05 on Friday. The stock has gained 8.2 percent this year. Buffett said Coke's method of valuing stock options should put an end to the arguments by some companies that say options are difficult to measure and may distort balance sheets. ``The way to obtain a fair value of something is to go out and get firm quotations from people who really have to put their money on the line. That's better than any kind of fair market value that's determined by any academic calculation,'' he said. Valuation Instead of using the popular Black-Scholes formula, Coca-Cola will calculate its option expense by averaging four numbers from two ``major financial firms'' that are based in New York, Coca- Cola Chief Financial Officer Gary Fayard said. He declined to identify the firms. Coca-Cola will average the quotes from the firms to buy or sell Coca-Cola shares under terms identical to those of options granted to employees and executives. Coca-Cola CEO Doug Daft made the decision to begin expensing options, and Buffett suggested the valuation method, Buffett said. Buffett said he didn't lobby Daft to make the change. ``But I certainly was enthusiastic when Doug Daft called me and said he thought it would be much the preferable way to report,'' Buffett said. ``I'm sure he knew my views because I've written and talked about it in the past. But it was not at my urging at all.'' Boeing, Winn-Dixie Options issued in the fourth quarter will be the first to be treated as a recurring cost on income statements, Coca-Cola, the world's largest soft-drink maker, said in a statement. Net income this year will be reduced by about 1 cent a share by the change. Boeing Co. and Winn-Dixie Stores Inc. had been the only companies in the S&P 500 to expense options. Real-estate investment company AMB Property Corp. on Monday said it started expensing options. Fayard estimated the reduction in net income will increase about 2 cents a year until it reaches 9 to 10 cents a share in 2006. Coca-Cola's net income in 2001 would have been 5.1 percent less, $3.77 billion instead of $3.97 billion, had options been expensed, according to the company's annual report. Net income in 2000 would have been reduced 8.4 percent and 1999 by 6.6 percent. Options are a form of compensation and should be expensed, some proponents have said, including Federal Reserve Chairman Alan Greenspan and Vanguard Group founder John Bogle. They say omitting options from an income statement obscures a transfer of wealth from shareholders to management and employees, understates compensation costs and encourage executives to manipulate results to boost the value of their options. Each option granted to an employee cuts the value of shares already held by investors. Difficult to Value Computer-technology and other companies have fought proposals to expense options. Those companies say such accounting reduces profit and the options are difficult to value. U.S. Treasury Secretary Paul O'Neill and other opponents have said the Black- Scholes formula and other methods for valuing options are inappropriate for use on income statements. Buffett ranked behind Microsoft Corp. founder Bill Gates on Forbes magazine's annual list of the world's richest people, which pegged Buffett's net worth at $35 billion. Shares of Berkshire Hathaway have outperformed the S&P 500 in all but five of the past 36 years. The stock is down 12 percent this year versus a 20 percent drop for the S&P 500.