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To: rkral who wrote (63360)	3/16/2003 8:49:55 PM
From: hueyone	Respond to of 77400

re: legalized cooking the books Well, as you know, the only reason failing to expense stock options on the income statement per fair value accounting is legal now, instead of considered outright cooking the books, is because we had some politicians on Capitol hill susceptible to campaign contributions back in 1993/4 that indefensibly decided that they, the politicians, were better qualified to determine accounting standards than the independent accounting experts at the FASB. And as you are also probably aware, former SEC Chairman Arthur Levitt now says that failing to stand with the FASB against this politically inspired abuse of power by the Washington politicians, was the single greatest mistake he made during his career as SEC Chairman. He says he did it not because he disagreed with the FASB recommendation, but because he was afraid that the pols would denude the FASB completely, the independent standard setter for accounting, if the FASB pushed ahead with their recommendation. Regards, Huey

To: rkral who wrote (63360)	3/16/2003 9:29:29 PM
From: hueyone	Read Replies (2) \| Respond to of 77400

Here are some excerpts from a PBS Frontline interview with former SEC Chairman Arthur Levitt, Chairman of the SEC from 1993 to 2000. He goes into a lot of issues besides accounting for stock options, but I will excerpt those comments related to accounting for stock options. The interviewer's questions and comments are in italics. pbs.org Let's talk about FASB. Let's go back to the early 1990s and the fight over stock options. Why is it important for me, as an ordinary investor, to have a good rule on stock options? Stock options are an obligation of the company to give an ownership of that company in the form of stock to employees of the company. That is a clear obligation of the company. The argument made by the standard setter then was to have the company put that down on the balance sheet as an expense item, that it is a cost to the company. Corporate America went ballistic at that time. I probably spent a third of my time talking to corporate officers who felt that the SEC should prevent the standard setter from expensing the cost of stock options. Because? Because that would, in their judgment, lower their earnings. It would cause them not to give stock options to employees and to executives. And the argument they made was that they couldn't hire people, they couldn't get good executives, and that the whole future of their company was put in jeopardy by the expensing of stock options. Isn't there something to that argument? In the 1990s Silicon Valley was saying essentially you're going to kill the golden goose. What do you say? I don't buy that argument one single bit. Stock options have been a useful device. They're part of the culture of American business. That's not going to disappear overnight. If it takes a stock option to induce an employee or an executive to come to a company and that stock option has to be represented as a cost on the balance sheet, in my judgment, America's executives are going to pay that price. It is not the end of stock options. It is not the end of entrepreneurship in America. In my judgment, that is a specious argument, and I don't buy it. So FASB has come up with this new rule. What happened? When I came to the SEC, this new FASB rule to expense stock options had galvanized the American business community and brought literally hundreds of CEOs to my office in Washington to urge me to prevent the FASB from going ahead with this proposal. ... But what happened during the course of this fierce debate and dialogue was that the Congress changed, and Newt Gingrich brought to power a group of congresspeople who were determined to keep FASB from enacting this rule proposal. My concern was that if Congress put through a law that muzzled FASB, that would kill independent standard setting. So I went to FASB at that time, and I urged them not to go ahead with the rule proposal. It was probably the single biggest mistake I made in my years at the SEC, because this was during the first four months of the so-called Gingrich Revolution. The country has swung far to the right. What I didn't realize is, as we got to the summer of that year, the country had begun the swing back to the center again where it always gets. The likelihood of congressional action to muzzle FASB, I believe, was very remote. But what did Gingrich actually do? Did Gingrich get in touch with you? Did they write a letter? What happened? Gingrich spoke about this issue. He didn't talk to me directly. But he spoke about the issue a number of times. This was clearly on his agenda. You've been talking a lot about distortions of reality. Is the failure to expense stock options a distortion? Does that distort company income? Yes. Investors should care deeply about expensing stock options, because those options represent a distortion of the earnings of the company. Right now, options are treated as a footnote, but that's not good enough. Those options represent a claim on the company, and a claim that may very well and has been exercised. So what you're saying is stock options are a cost of doing business that businesses don't show their shareholders? Stock options are a cost of doing business that is not clear to many American investors. [Prior to the Gingrich Revolution, what happened in the Senate regarding the FASB rule?] The Senate passed a [resolution] about the proposal of the standard setter to expense stock options. Why did they do it? There was no question in my mind that campaign contributions played the determinative role in that Senate activity. Corporate America waged the most aggressive lobbying campaign I think that they had ever put together on behalf of this issue. And the Congress was responsive to that. You have Sen. Joe Lieberman of Connecticut leading the charge. Why? I don't know. I honestly don't know. Sen. Lieberman is my own home senator, and I have great regard and respect for him. I've spoken to him about this issue a number of times. And I simply do not understand where he's coming from. What were his arguments? The arguments were the arguments being used by the business community: that this was a break on entrepreneurship; that this would keep companies from being able to hire good people; that this would destroy companies; that this would distort their earnings. All the arguments used by the business community were the ones set forth by Senator Lieberman in his opposition. ... Regards, Huey